 Hey, welcome back to Think Tech, talking tax with Tom on a Wednesday. Hi, Tom. Hi, Jay. That's Tom Yamachiki, president of the Tax Foundation of Hawaii. They watch our taxes. But in so doing, they watch fiscal policy too. Okay. It's all about taxing and spending, and it's got to be in balance. Matter of fact, the constitution at least theoretically, the state constitution at least theoretically requires that. Yeah, it doesn't say so explicitly, but there's been a kind of a gloss on it that certain words can say you need to have a balanced budget. Right. And that has been, I think, one of the problems that at least last year, when I wrote about the situation, we had a state financial plan. I don't know if you're familiar with it, but we have a state financial plan. And the state financial plan pegged us for spending in excess of what we were receiving for three or four years in a row, like $200 million in the red every year. So 2019, $200 million, 2020, $260 million, 2021, another $200 million, 2022, they go back to $100 million, only $100 million. Be thankful for the small things. That's correct. Yes. And that's not really acceptable, because we're not that healthy anyway. We have a huge number for unliquidated liabilities, and I remember we had a program, I think I got a program in Fuller Hall in the women's Y a few years ago, where we explored exactly how stable the state, and a lot of our experts felt that the ultimate unpaid liability here was going to be huge. I mean, soon, like $40 billion, we'd have to belly up somehow and cover that. And that includes the cost of repatriating the homeless. It includes the cost of handling certain issues which we promised to handle. And I don't think actually it included the cost of dealing with extreme weather, which could be devastating, and which could require a lot of money, and we can't be sure that it's going to come from Washington. Look how most recently federal government, that is Donald Trump, stopped funding for Puerto Rico. Even though Puerto Rico is in terrible, terrible shape, and it has never recovered from Maria. So we can't assume that somebody's going to write a big check. Somebody's going to come and do FEMA with us. Somebody's going to rebuild our society after extreme weather. And chances are, one of these days, maybe even this summer, we could have extreme weather. So you have all these unfunded liabilities and no cushion. This is a big problem, don't you think? Oh, of course. I've kind of been looking at the situation. And I kind of, vision hold our big problems into the three P's. One of the three P's is pension. And what I mean by that is, we have made these big promises to our state workers, not only to give them pension, but also to cover their health care in some cases for as long as they live. Huge. And that was one of the elements of that $40 billion, by the way. Well, I'm sure it was. We also, just to be doubly sure, we passed a constitutional amendment, I think was back in the 70s or so, saying that these benefits to our state workers will not be diminished. Period. Come hell or high water. And the only way we can change that is through another constitutional amendment. Lots of luck. And HGEA would oppose the second constitutional amendment. Well, of course it would. And as well as probably every other organized labor organization in the state. But what that highlights is that we have this obligation for what we have promised for workers after their employment end. We have this constitutional provision that locks it in place. So even if we make changes now, they would only apply to new hires. And it would not have any appreciable financial effect for, you know, five, 10, 15, 20 years. Well, you know, this has been expanding as a problem for a long time. I mean, it's not like there's any rule out there that says you can only hire X number of state employees. Remember the thing, oh, God, I remember so well, the big argument a few years ago. How many state employees do we have? Nobody could answer it. And there's no rule. There's no rule about what percentage of the labor force should be working for the state or the city. And that points up to another big problem. And one of the big, big problems has been who knows how much money the state has. There are a lot of people who don't know, and the reason is because the money isn't in one place. It's in special funds, as well as in the general accounts. The methods for dealing with and or accounting for special funds are varied and, you know, sometimes not consistent. Sometimes the departments fail to report them like they're supposed to. They're holding a little something for themselves, isn't it? I mean, it's not just an error. It's not an oversight. It's just, they just own a whole little rainy day money for themselves, isn't it true? That's what it seems like. I mean, you never know what the actual motivations are, but so, you know, one question is, how much money does the state really have? Yeah. You know, after you answer that question, then maybe you can kind of get to, well, are we spending it properly or are we spending too much? Well, and is it accessible, you know, for the state in general? It's essentially hidden. Linda Lingle, we talked about this last show. Linda Lingle had an initiative to try to find it. I don't think she ever found it, maybe some of it, but there's a lot of money out there where if you're the governor and you say, gee, we need to dig deep. We need to get the special fund money. We need all of it now for a special emergency, okay? It's not clear what would happen. It's not clear that we'd have access to it. Yeah. I mean, I'm not even sure that the executive departments would cooperate because, you know, as you know, there are elected officials, right, who are at the titular head of government. The issue orders to these departments. The departments have a lot of civil service people, and a lot of them have the mentality of, oh, well, you're here now. I'm here now. In four years, you will be gone and I'll still be here. I've seen that. I've seen that personally. Extraordinary. It's like, I'm comfortable. It doesn't matter what you do. I can outlast you. So I'm not going to listen. Right. So that's the first P tensions, and around that there are some very, very serious issues about kind of counting what we have and where we have it. Yeah. So this is a problem because, and I'll just take the one thing that troubles me most, although the Employee Retirement System troubles me greatly, I mean, we, oh, how much was it? It was billions. It was several billion dollars in arrears on paying the required contributions into the Employee Retirement System. And that's not even as big as the EUTF, the Employee Union Trust Fund. That's different. Right. That's another one. Right. It's bigger. Yeah. It's a huge amount of money. I guess let's focus on that just for a minute. So if I'm in the union, if I'm a state employee or a retired state employee, and I realize this is going to affect the ability of the state and those funds to pay my retirement to take care of my medical, what have you, which was promised to me. And I've worked all these years in reliance on that promise. And it's not going to be there. We're coming to that. We really think we're coming to that. What do I do? Who do I go to? Who do I sue? What do I say? How do I get the government to correct this? How do I get to correct this? What do I do? Well, I think your best bet is to do nothing because a lot of people think, you know, this is like a problem with, you know, if the government's not going to pay me, you know, I'm entitled to the money. I'm going to sue for it. I'm going to do whatever it is. But, you know, the fact that the government may not have enough money in the present is not my problem. Okay? You got to pay me. Constitution says that. You got to pay me. If you've got other problems, you know, it's not my call. I'm the priority. Constitutionally. Yeah. I'm the priority. Which is, you know, that's nice if there is enough money somehow available. Okay. Now, go to the thing I worry about most and I worry about extreme weather. I worry about the Puerto Rico scenario. I worry about the possibility of the island, this island, you know, the center of the state, the headquarters of the state, the business center of the state will be wrecked in a storm. And you know, we won't have the center anymore. Our buildings, our infrastructure, all of the things that connect everything up will be gone or damaged to the point where we can't pay. And we'll be far away from any help. That's what I worry about. I mean, for example, if some critical piece of equipment goes in our infrastructure and it was made in Germany, how are we going to get it here? How are we going to install it? How long will that take? You know, this is pretty serious. How much will it cost? Who's going to pay when there's no revenue, when tourism stops cold, right? Right. We could be in such dire straits to make Puerto Rico look great. So, you know, when that happens, where do we dig? Do we have a special fund for that? We have a little rainy day money for that? Where do I get? Where does the state get the money to handle that? In theory, we have a rainy day fund. What? What is it? That's what it's called, a rainy day fund. Okay. Sorry. I'm just kind of getting educated here. Yeah. Deposits are made to it every time we have excess money. The Constitution requires that if we have, you know, a fund balance surplus in, I think, two years in a row of a certain percentage, then we either have to feed unfunded liabilities. We have to make a deposit in the rainy day fund or we issue refunds to the taxpayer. Okay. In this past session, we passed a bill to do the second of the three, and that is to make a contribution into the rainy day fund. I think it was, you know, I don't know, $5 million. Penance. Yeah. I mean, it would cost billions to fix Humpty. That's right. So, where do we get the bit? Does the rainy day fund have billions? No, but Uncle Sam does. I mean, I think that's the theory. You're making a big assumption that FEMA will come through that President Trump, who doesn't like Hawaii very much. It's a democratic stronghold. But it's still a state. I think that's the one thing we have over Puerto Rico. They're not a state and we are. That's comforting, Tom. Yeah. I hope that's something we don't have to rely on, but we can rely on that. So, you know, in terms of the council on revenues, that whole mechanism that tells us what the budget should be, does that build in rainy day fund too? In other words, they say, well, council on revenue thinks that we're going to get this much in tax receipts this year. So, we should actually spend X dollars, less Y dollars, and put Y dollars in the rainy day fund. Well, they don't do that. What COR does is estimates the revenue that's coming in. I mean, that's pretty much all they do. What they do with it is the legislature's going on. And to a lesser extent, the governor is because he needs to sign off on the budget bill. Well, it strikes me that I'm casting about for a mechanism that would protect us, that would handle these 40 billion plus, plus, plus coming up. What did I hear on the radio yesterday that per capita we have the highest number of homeless in the country? Per capita. Pretty serious. I mean, who's to say who they are, where they came from, what their life is like, what the government can do, is doing, should do, you know, to support them and repatriate them. But it seems to me that the numbers are increasing. And over time, it's a threat to our society, the stability of our society. Not only in Oahu, but all the islands. Well, I guess the blessing and the curse that we have is it's, you know, warm and habitable all year round. If you're homeless and in New York City, and it's the wintertime, you may not survive the winter. And that's how we get rid of a lot of the homeless, I guess. Come out here and enjoy a little sun. I've talked to homeless people. They really like it here. This is a really, really good place. So, you know, I'm just, I'm wondering, you know, whether there's a tipping point on the homeless. I mean, right now we kick the can down the road. And we make political statements and speeches, and we have iconic projects that really are not calculated to handle it. You know, they say that 15,000 homeless is probably more. And a lot of it is not in the hands of government. It's in the hands of private nonprofits. And that may not be enough. And, you know, if you give money, well, that's an optional thing. We need a system. And the question is if we don't have a system and we reach a tipping point, we call it a societal stability tipping point, where instead of 15,000 or 20,000, whatever it is, now we have 30,000 or 40,000 or 100,000. This really undermines, you know, law and order, and stability and the economy if we have this. Furthermore, we're a tourist economy. Our, my far, our most important industry is tourism. Well, having a homeless guy or woman on the steps of your hotel, you know, I remember going to Manila one time. That's what they had on the steps of the hotel. It's not good for business. It's not good for business. And it would diminish the tourist business and the brand, you know, over the long term. So it's become really critical for us. It is really critical for us to handle the homeless right here, right now. We're not doing it. So that's another one of the four P's, protect the brand, right? Yeah, yeah. We have assets here in Hawaii that give us our income. We have, you know, these institutions and these natural features that constitute our economy that get our engine running. And that's what we got to protect. Yeah. And we have to build industries. That's another show. It's a, you know, like we could talk about technology. We could talk about astronomy. We're not going to talk about that today. Yeah, we'll talk about two more P's though, right? Okay, go ahead. And then you've got a break coming up, right? Yeah, let's talk about a B instead of a P. Let's take a B and have a break. And when we come back from the break, we'll talk about the two remaining P's. All right. I'm Yamachika, President of the Hawaii Tax Foundation. We are so happy to be able to talk to him and find the answers to these difficult questions. We'll be right back. Aloha. I'm Keisha King, host of At the Crossroads, where we have conversations that are real and relevant. We have spoken with community leaders from right here locally in Hawaii and all around the world. Won't you join us on thinktechhawaii.com or on YouTube on the Think Tech Hawaii channel. Our conversations are real, relevant, and lots of fun. I'll see you at the Crossroads. Aloha. Hi, I'm Rusty Komori, host of Beyond the Lines. I was the head coach for the Punahou Boys varsity tennis team for 22 years, and we're fortunate to win 22 consecutive state championship. This show is based on my book, which is also titled Beyond the Lines, and it's about leadership, creating a superior culture of excellence, achieving and sustaining success, and finding greatness. If you're a student, parent, sports or business person, and want to improve your life and the lives of people around you, tune in and join me on Mondays at 11 a.m. as we go Beyond the Lines on Think Tech Hawaii. Aloha. We're back with Tom Yamachika, president of Hawaii tax foundation here on Talking Tax with Tom, and we have two more piece to cover. This is very important in our discussion of fiscal responsibility. So what is procurement? What's that about? Okay, procurement is the process by which our government goes out and buys goods and services that it needs. So it can't do everything itself. Its employees can only do so much. You still got to buy things, right, that we don't produce ourselves or services that we don't have the expertise for. So there have been complaints over the years that, you know, we're paying too much for stuff. And if we can figure out a way to pay, like, real actual market rates for things or less, given the state purchasing power that we have or could potentially tap into, then we'll be paying a lot less for the stuff that we need today and we could save up more for tomorrow. Yeah, and the other side of that, though, is this issue about corruption and about bringing in your cousin's aunt's uncle to do the job, and, you know, violating any sense of pride even for that matter of law. So we have the procurement code. And I have personal experience with that, too. Procurement code is the most bureaucratic thing you ever saw, and it holds the stuff up, and it does not actually result in the lowest price, although technically that may be so. And it takes forever to get things. So the result is that the state and agency cannot actually get it right away. It has to go through this process, which everybody sort of accepts, and it's sort of the zen acceptance of the delays and complications of the procurement code. I don't think it's efficient at all. Yeah, the Department of Education kind of found one way to get through at least part of it by something called job order contracting. That's something that they recently publicized. I wrote about it earlier this year, and it's basically a means of saying, well, okay, we, the Department of Education, are going to be looking for certain goods on this menu. So contractors bid on the individual items in the menu, although it's not needed at the current, you know, at the present time, and then when people do need it, they can kind of order off the menu. And, you know, since all of the negotiation and bidding and award and that kind of thing has been done before, or it's been done already, and it's in place, all they do is just pay the money and get their stuff. Does it work? According to DOE it does. They've recorded some very impressive gains with cooling the classrooms, for example. I sat on the neighborhood board for a while, and the DOE would come to us and say, can you guys, you know, antiep a few bucks from your pocket from your wallet right now, because we have to buy pencils from the school. Oh, my God. You know, if the state has a billion-dollar budget on education, they can't afford pencils? Are you kidding me? I mean, it's that kind of inefficiency. That's a light word for it. But I'm hoping we're on a track anyway, but that will be better off coming soon. Yeah, another thing that seems to be in the way is there's a lot of silo mentality around procurement and around spending. Recently, this nonprofit called Education Institute of Hawaii was in the news because they tried to get the DOE's general ledger and was publicly rebuked by the superintendent Kishimoto. So they filed suit. And that was earlier this month, last month. This is August already, so it was in July. And it's still pending in the court system, but we may get something very interesting out of that. You know, this goes to leadership. You know, just as the question of how many employees are working for the state and the counties and, you know, what percentage of the total population is represented there and are there too many of them? You know, I think the answer is clear. There are too many of them because they hire and hire. If the budget for one year will afford the hire, then that's a permanent addition to the workforce. And you can't get rid of them or their benefits. It's really amazing. But leadership should be looking at that. Is the leadership looking at that? Is the leadership looking at the procurement code? Is the leadership looking at trying to balance this and developing a resilient fiscal policy for the future? Not that I'm aware of. Maybe they are, but they haven't told people about that. And, you know, if they're coming up with a financial plan that's 200 million in the red every year, I mean, you wouldn't think so. No, I guess not. What's the last P, Tom? The last P is permitting, okay? And it's kind of a big cog in our economy and it's kind of more at the county level. You have people who, you know, want to build on land. You have people who want to improve buildings and structures and so forth and they have to go through this process called permitting. And it holds up and it affects, you know, many, many different industries, many, many different people. Sometimes for years and decades. Yeah, and it's legendary in that respect. I remember Castle and Cook talked about its first project out in Mildilani somewhere, a housing project. And they needed to get, I guess, county and state approval to do this. And it said, from the time they conceived the project to the time they got the permits was 40 years, 40 years. I don't think it's that bad for every project, but that's an example of outrageously long it can take to get permits in the state. Yeah, and it's not only just the state or the city, but also, you know, there are different, you know, sub-agencies and commissions and, you know, like the Historic Preservation Committee. There's a coastal land management board. There's all kinds of things that get implicated once you do a project in a certain location or that does a certain thing. And come on, why don't we just consolidate all this stuff? You know, give, you know, the plans that the review they need if we need to go through a separate process like a environmental impact statement, you know, have one agency that can help with that. But, you know, going through, like, you know, billions and billions of different sub-iterations and then if one thing goes wrong and one of them going back to the beginning and having to go through everybody again, that's just ridiculous. Well, you know, if you have too many employees, they all got to do something. And if there are a lot of people on the permitting gauntlet, so to say, and they all have to be occupied to earn their salary, then they're all going to be a stopping point. You know, I remember one point, many points, I had to take a flight for the state of Hawaii and they said, you know, you're going to get reimbursed for your parking at the airport. I think that's great. So, you know, I spend $7, $8 for my parking at the airport and put a chit in to get reimbursed for it. It would take six months for me to get a check. And that chit passed through the hands of dozens of people before it got approved and paid and the check sent to me in the mail. I said, gee, I wonder how much money they're spending on reimbursing me for the parking, which was $7 or $8. Did you know, for example, that you know when you get a tax refund? It isn't the Department of Taxation that cuts the check. The Department of Taxation takes in your money, right? But it can't issue check. It has to go to the Department of Accounting and General Services to assure their checks for them. Now, I can see that being, you know, they're doing that initially to try to consolidate disbursements and make that process more efficient. But, you know, sometimes it just reaches the point of idiocy. Nobody will argue that the state is not efficient. I mean, Neil Avakramby was trying to upgrade the computer system and he hired a guy from GSA and brought him out here. I can't remember the name right now. He spent a lot of money, including private-public partnership money to examine whether the state, you know, needed to have an upgrade on its computer system because it was a piece on this on NPR, I rather, HPR a few days ago. Fact is they got lots of disparate systems. They don't talk to each other. It would be okay to have one department, you know, identify what the refund is and another cut the check as long as they were integrated on the computer system, but they're not. You know, I remember Andrew Oakey one time got in front of our venture capital association and it was really funny. He said, you know, we do this by walking down to the post office and depositing it in, depositing the checks or making a request, you know, it's like old-fashioned stuff that could have been automated years ago and so, you know, we throw away a lot of money and it justifies the jobs of a lot of people who probably we don't need in the state workforce and so I understand where the tax foundation is coming. I know your secret. I know why you're interested in this stuff because if the state is inefficient and throwing away money left and right on things it could fix, like the computer system, all it has to do is, you know, develop the political will of that system. All it has to do in all of this is to, you know, have the leadership and the political will to become more efficient, like other states are in many ways, then we would have less risk of the pressure that you see and I see for an increase in taxes. Ultimately, we're going to have to increase in taxes to cover these funded and unfunded liabilities and I know the method of your madness here. I know why you're interested in this fiscal responsibility issue. It's just madness. You're right about that part. Am I right? Well, we try our garnest to bring the issue in front of people whether they, you know, what they do with it once they see the information is kind of another thing but, you know, we do what we can. Yeah. Tell me, tell the people, what do you recommend in terms of, I make you governor, okay? What do you do? Well, we start, I think we have to start looking at those four P's and, you know, make them a priority and get them fixed. Then I think we'll be a lot better off. I suppose what you're really saying is that the four P's are governed by the fifth P. Which is? Priority. Well, of course, yes. Tom Yamachika, president also of the Tax Foundation of Hawaii. You want to roll there, Jay? We're both on a roll, Tom. Thank you so much. Thank you so much. Aloha.