Social programs prioritized in Hawaii budget

Hawaii lawmakers prioritized spending to bolster programs to aid its poorest residents and house homeless people in the $37.2 billion biennium operating budget signed by Gov. Josh Green last week.

Homelessness has become such a widespread and entrenched problem in Western states that lawmakers are dedicating billions of dollars to help lessen it. It has become a ratings factor under the social tenet of environmental, social and governance (ESG) for some rating agencies.

“Millions of dollars have been put forth to tackle homelessness, the housing crisis, mental health and workforce shortages, to name a few,” Sen. Donovan Dela Cruz, chairman of the Senate Ways and Means Committee, said in a statement. “With the signing of HB300, the state budget bill, we can expect that the resources provided within it, coupled with the shared commitment of the Legislature and the governor, will allow for considerable progress to be made in addressing Hawaii’s greatest challenges.”

Green had singled out combatting homelessness as a priority in his state of the state speech in January, and again during a talk at the Milken Institute’s global conference. About $500 million is dedicated to affordable housing, though final figures were not available as of press time.

“When we received the Council on Revenues’ lowered revenue projections, it was clear that we had to right-fit the budget to align with the priorities of our Administration and legislature — housing, homelessness, healthcare services, education and the environment,” Green said in a statement.

Green is not alone as governors in Washington, California and Oregon have also prioritized spending to tackle entrenched homelessness problems in their budgets this year.

In California, the state and its cities have also issued billions of bonds to support programs to build housing and provide funding for mental health and addiction problems.

Green also signed House Bill 954, which he said, gives $104 million of income support to local taxpayers.

The bill doubles the size of the Earned Income Tax credit for five years, providing $50 million of additional support. It also doubles the amount of the food excise tax credit, benefiting an additional 90,000 of the “most economically vulnerable residents in the state,” according to a release from the governor’s office. Working families will also receive a refundable credit of up to $3,000.

The budget appropriates $10.7 billion in fiscal 2024 and $9.8 billion for fiscal 2025 in general funds, $19 billion in fiscal 2024 and $18.2 billion in fiscal 2025 for executive branch departments and agencies for the operating budget. The budget also appropriates $2.9 billion in fiscal 2024 and $1.3 billion in fiscal 2025 for capital improvement projects.

Green provided his preliminary list of line-item reductions and vetoes to lawmakers. He has until Friday to provide a finalized list.

The Council on Revenues lowered its forecast for revenue growth by 3% to negative 1% for fiscal 2023 in a report provided to the administration in May.

The 3% decrease in the fiscal 2023 revision is due to the constitutional refund, which reduced fiscal 2023 revenues, to lower estimated tax payments and higher refunds, COR wrote in its forecast. “Lower capital gains income due to poor performance in the stock market and a cooling in the real estate market are the likely causes of lower estimated tax payments,” COR wrote.

Risks that may inhibit the “economic recovery include inflation and an aggressive monetary policy response from the Federal Reserve, risks in the banking sector, labor shortages, supply chain disruptions, sustained travel hesitancy from Asian markets, and the reduction in federal stimulus spending,” according to COR.

The council expects visitor spending will plateau in the coming months with an increase in foreign visitors making up for a slight shortfall in domestic visitors, who are expected to shift travel to Europe, given the current strength of the U.S. dollar.

“Given the prominent role of tourism in Hawaii’s economy, the number of visitors to the state will have major impacts on the economy and tax collections,” COR wrote.

Hawaii’s rating outlooks took a hit at the height of the pandemic because the state continues to be so tourism-dependent despite some headway in diversifying the economy.

Hawaii has ratings of Aa2 from Moody’s Investors Service, AA from Fitch Ratings and AA-plus from S&P Global Ratings. It has stable outlooks from all three rating agencies. Moody’s revised the state’s outlook to stable from positive on October 17.

The state’s tourism industry was “hard hit by the public health crisis partly because of initial visitor quarantine requirements the state imposed,” Moody’s analysts wrote in October. “Now, new global economic headwinds could weigh on Hawaii’s recovery; high inflation and interest rates will likely erode consumer purchasing power and diminish business investments, and a strong dollar could deter foreign travelers.”

Its government and defense industries also “provide critical anchors to the state’s economy,” according to Moody’s. The state’s strong reserves, historical fiscal conservatism and prompt actions to address past shortfalls were considered credit strengths by Moody’s. Its high cost of living, outmigration, aging population and below-average labor force participation rate constrain long-term economic growth, according to the rating agency.

Moody’s outlook revision to stable came because of the “expectation that given its significant tourism industry, lagging demographic trends and already high cost of living” the state is vulnerable to “high inflation and potentially less favorable economic conditions ahead.”

It, however, “benefits from conservative and proactive fiscal management as well as strong executive authority to reduce spending,” Moody’s said.

Moody’s analysts also noted that the state’s economy has experienced a dramatic turnaround from the coronavirus-driven recession; but its full recovery will likely take place behind many of its peers.

The state’s high leverage and fixed costs are also credit weaknesses because they limit financial flexibility.

Overall, Moody’s said federal pandemic aid and better-than-expected revenue performance in recent years have resulted in a significant increase in the state’s reserves to record levels, which will help the state weather economic headwinds.

The budget season started out acrimoniously, but House Speaker Scott Saiki, D-Ala Moana Kaka’ako said the budget and tax bills “truly represent cooperation between the Administration and 76 legislators.”

The budget and tax bills “will deliver direct relief to over 200,000 families, our statewide parks and trails, our climate, and unsheltered individuals in need of mental health assistance,” Saiki said.

Dela Cruz hailed the tax break as a positive financial benefit for struggling families.

“By increasing the tax credits for household and dependent care services, refundable income and income threshold and credit amounts for refundable food and excise tax, HB954 aims to provide much-needed support to working families,” Dela Cruz said.

Hawaii Community Foundation CEO Micah Kane said it was important for the governor and the Legislature to allocate resources “for immediate relief for the families that addresses major cost-drivers, like early learning and affordable housing.”

“You can’t really do one without the other; you have to do both,” he said. “I think the governor’s investment in affordable housing and continued commitment to early learning will reduce ALICE numbers in the long run.”