Experts caution state on spending surplus

State lawmakers are in a position this year that many would envy: deciding what to do with an extra $570 million.

That is because Hawaii's flush economy has been flooding state coffers lately with considerably more money than the state's prognosticators -- the Council on Revenues -- ever predicted.

The council, for example, forecast a growth rate of 6 percent for the Hawaii economy in fiscal year 2006, which kicked off July 1.

But actual tax collections flowing into the state's general fund rose by 13.7 percent in the first five months of the fiscal year. By the end of June, the state Department of Finance has projected, Hawaii's surplus will climb about $83.6 million, to a record-breaking $570 million.

While spending such a windfall might seem like easy work, economists inside and outside the state are cautioning against any drastic moves that do not also secure the future of a state dependent on a single, capricious industry -- tourism -- for its economic health.

"We should always be so lucky to have extra revenue, but it's not always going to be the case that it'll be true," said Paul Brewbaker, Bank of Hawaii chief economist and council chairman.

In her supplemental budget presented last month, Gov. Linda Lingle proposed taking advantage of some of the projected revenue excess to provide about $300 million in tax cuts and credits while doubling the state's "rainy day" fund to $110 million.

No such measures have popped up in the plans of Democratic lawmakers, who have cited the need to spend more on costly, persistent problems such as the dilapidated public schools, and who -- with 80 percent dominance in the Legislature -- hold the state purse strings.

Compared with a line item in a budget, the effect of tax credits on state revenue is difficult to track because of the privacy of people's tax filings, Brewbaker said.

And tinkering haphazardly with the state's tax code by introducing new tax credits and tax rate reductions can have an unpredictable effect on the economy, he said, because lawmakers cannot see what problems might be in store.

For example, a plan to phase in income tax rate reductions over four years beginning in 1998 turned out to be a poor choice when Sept. 11, 2001, and a mainland recession happened in the later years of the plan, he said.

Since then, Hawaii appears to be doing something right.

In May, Moody's Investor Service upgraded the state's rating for general obligation bonds, the type issued with the understanding that a municipality will be able to pay them back with taxes or other revenue.

The company bases its ratings on a number of factors, including the area's economy, the debt it already has and management strategies, said Lisa Tibbitts, spokeswoman for rating at Moody's.

"It's rare that you can put your finger on one factor" that pushes a rating up or down, she said.

Among the financial strengths listed by the company in announcing the upgrade were Hawaii's growing revenues, strong housing market and low unemployment. To move up, Hawaii would need an economy with a strong foothold in industries besides tourism. It also would have to maintain a balanced budget and get control of expenditures, especially rising Medicare costs, according to Moody's.

Another smart thing for states or local governments to do when they find themselves with extra revenue is to build reserves, particularly if the economy is dependent upon a fluctuating industry, said Gabe Petek, a credit analyst specializing in Hawaii at Standard & Poor's.

The good news is that the governor's supplemental budget proposes increasing the rainy-day budget reserve, he said.

"The bad news is that even at $110 million, that's just still a fairly relatively small budget reserve when you look across the states," Petek said.

And while meddling with the tax code is ill advised, correcting distortions -- such as a standard income tax deduction that has not kept pace with the federal deduction -- makes sense, Brewbaker said.

So does investment in projects girding the state's infrastructure, which did not get a whole lot of attention during the 2005 session, he said.

"I don't remember anybody saying how much money we've just spent to upgrade the physical facilities at our schools, which would be part of that complex of issues," Brewbaker said.