Economy looks up, but
financial challenges loom
Editor's note: The following essay is an edited version of a speech Gov. Linda Lingle presented Tuesday at a Rotary Club luncheon in Waikiki.
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And we had the largest export growth in the nation during the first quarter of 2004 at 92.4 percent. That's because the nation and the world increasingly embraced our Hawaii-made and Hawaii-grown products, including coffee, purified deep seawater, fresh fruit and aloha wear.
We're opening new markets for our products and services. Lt. Governor Duke Aiona and officials from the state Department of Business, Economic Development and Tourism recently returned from a hugely successful mission to China. As a result, we were granted permission by the Chinese government for the department to open an office in Beijing. We're only the second state to receive such an approval.
Visitor arrivals have surpassed all expectations, and this could become the best year for tourism our state has ever seen. And visitor spending is at an all-time high. The Japan market is rebounding and all indicators are strong. With the increase in seats by Japan Airlines, Northwest, United and Continental later this year, Japan tourism should continue to improve.
How did this dramatic turnaround occur? Low interest rates helped. Federal spending helped. Improved U.S. and Japan economies helped. Besides these external factors, people in business, labor and non-profit sectors are a big part of our success. They toughed it out during more than a decade of recession.
There is also a new attitude in state government, now "open for business." We cut business fees by half, saving companies $1.5 million a year. We passed pro-jobs legislation. We fixed the Act 221 technology tax credit program and extended it for five years.
We established a One-Call Center where contractors can learn the location of underground utilities before they start digging. We helped businesses with small numbers of employees by enabling them to work through trade associations to negotiate lower health insurance rates.
The majority party in the Legislature blocked other pro-business measures proposed by my administration. Those included a nine-point plan for workers' compensation reform that included allowing the insurance commissioner to investigate cases of fraud, and disallowing claims for stress arising out of legitimate personnel actions.
Hawaii is one of eight states that recently received an "F" grade in a national ranking for its workers' compensation system. That is unacceptable. We need broad support during the next legislative session to reform the system.
The Legislature needs to adopt a new business model that deals with problems before they become a crisis. We needed real education reform 10 years ago and now find ourselves ranked at the bottom of the nation. The illegal drug problem has become a crisis because we did not deal with it effectively during the last 10 years. And the lack of affordable housing and the problem of homelessness require massive action now.
In Thomas Friedman's book, "The Lexus and the Olive Tree," he makes the point that the world used to be a place where the big ate the small but now it is a place where the fast eat the slow. We have been in slow motion for too long and must get moving. We must be quicker to take action.
SOME PEOPLE believe you must choose between a strong economy and a pristine environment. That is a false premise. Without a pristine environment, the economy and our quality of life will decline. And without a strong economy, we won't have financial resources to protect the environment.
We are making substantial progress in environmental protection. This year we launched an invasive species initiative that is unprecedented in scope and scale. We've already allocated $3 million to battle these highly destructive invaders.
We also enacted a law requiring 20 percent of our energy to be generated from renewable sources by the year 2020. We released $18.5 million to upgrade the Waimanalo Wastewater Treatment Plant in order to stop sewerage from flowing to the ocean that has led to repeated beach closures. We established the Environmental Crimes Unit in the Office of the Attorney General, and we made dumping large amounts of trash a felony.
Besides having a strong economy, Hawaii must follow sound budgeting practices. It's actually very simple. We must stop spending more money than we take in, just as you must do with your businesses and in your personal lives.
ON JUNE 30, 2002, six months before I came into office, our state recorded a general fund operating deficit of $215 million at the end of the fiscal year. One year later, we had cut that deficit to just $16 million. By the end of the just completed fiscal year, we had a surplus of $67 million. At the end of next year we are projecting a $10 million surplus. This is real progress in our attempt to get the state's financial house in order.
But in fiscal year 2006, we will face an estimated deficit of $197 million because of massive increases in debt service brought on by previous debt restructuring plans, increased contributions to the state retirement system, and increases in employee wages. And in 2007 we're expecting a deficit of more than $77 million.
These estimates are based on current Council on Revenues projections -- which could change in September -- and assume there are no new wage increases for government employees -- which is not likely to happen. We will begin the next round of collective bargaining in a couple months for everyone except the University of Hawaii faculty.
Ongoing expenses must match ongoing revenues, especially during good times. The Legislature, however, submits figures that don't add up. It is not required to adopt a balanced budget, and it doesn't. The legislators just say: "We put it in the budget" without explaining how we're going to pay for it.
I believe former Governor Ariyoshi said, "I was left with a deep impression that many well-meaning legislators can become intoxicated by spending."
They pretend as if future-year expenses -- such as debt service, the Employee Retirement System and wage increases -- don't exist. They opposed my call for a constitutional amendment that would have required the Legislature to submit a balanced budget, as 40 other state legislatures must do.
SOME OF these legislators are engaging in election-year rhetoric, criticizing me for not releasing all the money for state grants at the beginning of the fiscal year. This is irresponsible on their part. The state does not collect all its revenue in the first month, just as you don't collect a year's salary in the first month.
The Democrats who want me to open the spending floodgates are the same legislators who have raided $156 million from the Highway Fund since 1996. Our state receives a four-to-one federal match on highway funds, so we lost $624 million.
These same Democrats skimmed $347 million in excess earnings from the Employee Retirement System and voted to restructure the state's debt, causing our debt service payments to rise from $353 million in fiscal year 2005 to $518 million in fiscal year 2006.
These are the same Democrats who reinstated binding arbitration that brought about pay increases we couldn't afford, and implemented a payroll lag as a one-time gimmick to make it appear we had more money than we actually did.
To address our upcoming budget deficit, we have two options: Generate more money or spend less. We're doing both. When we do have to cut funds, we aggressively seek other revenue sources, as was the case when we located untapped federal monies for culture and the arts.
Thanks to a growing economy and sound financial management, the state collected $98 million more in tax revenues through June 30, 2004, than had been projected by the Council on Revenues. Despite this good news, I will not give in to bullying tactics by Democrats and open the spending floodgates. I will not allow Hawaii to get into financial trouble. Our future does look bright, but many challenges remain.