My administration began seven years ago during challenging economic times and enters its final year in an even tougher economic climate.

The difference between then and now is that the challenges we face today are so much greater, revenue loss so much larger and the statewide impact so far-reaching that the decisions we have to make are much tougher.

I have already had to make some very difficult decisions—cutting popular programs and services, furloughing state employees, and, with great reluctance, laying off hundreds of people.

These decisions were not easy, nor were they the decisions I wanted to make.

They were the decisions that I had to make, given the situation before us.

Simply put, our state government is spending at a rate that substantially exceeds our revenues and at a level that cannot be sustained.

The mid-term economic outlook requires that we further downsize government, prioritize the services we desire and can afford, and together devise innovative ways to meet the needs of Hawaii's people.

We must face the situation as it is—not as we wish it to be; and we must make difficult decisions now about the size and nature of government that will keep us on a positive course for the future.

More importantly, we must do what it takes to create a future that does not financially burden our children and grandchildren simply because we weren't willing to make those difficult, sometimes gut-wrenching decisions, when destiny called on us to do so. Clinging to the programs, practices and government structure of the past will not work and cannot be sustained.

We have to create a government that is more efficient and able to provide essential services in a way that is affordable today and sustainable over time.

The global recession hit Hawaii hard and has affected us deeply.

Visitor spending plunged, construction stalled, unemployment doubled over 18 months, and businesses and consumers uncertain about the future retrenched.

It will take many months before our economy begins to rebound, and likely years before it returns to its pre-recession strength.

Because of the tough lessons we have learned about sudden and severe economic downturns, I will be proposing a constitutional amendment to rename and revise the state's Rainy Day Fund to create a Fiscal Stabilization Fund.

This fund will shield us in future years from the need to raise taxes during periods when the economy is contracting and citizens can least afford to pay more.

The Fiscal Stabilization Fund will ensure that in years when tax revenues are growing, 5 percent of the general fund's end-of-year balance will be placed in the Stabilization Fund prior to granting the currently mandated refund to taxpayers.

This prudent and important revision to the state's Rainy Day Fund will augment the fund's current source of revenue from tobacco settlement moneys.

On a positive note, the prudent fiscal management that we have exercised during both good and bad times has resulted in Hawaii maintaining a strong, double-A bond rating.

During my remaining 10 months as Hawaii's chief executive, my administration's resolve to move us forward in a fiscally responsible way will remain steadfast.

We are at a very unique point in our state's history—it is a time when both our current challenges and our future opportunities have never been greater.

It is with that thought in mind that I want to use my final state of the state address to speak with you about reaffirmation and rededication.

Reaffirmation of who we are and what we are for, and rededication to the kind of future we want for the next generation—a future we will all share.

The budget I presented to you last month, along with our legislative proposals, are aimed at creating new jobs and maintaining current jobs, encouraging investment, and laying the foundation for educational improvement and energy security.

Together they comprise a plan for our economic recovery and a road map for a brighter, more prosperous future.

Government cannot create a strong economy, but it can help provide a positive economic climate that makes it attractive to invest and create jobs in Hawaii.

It can also work hand-in-hand with the business community to build the foundation upon which private enterprise will flourish.

A good example of government creating a framework for success is the way public and private organizations have been working together to strengthen tourism—our No. 1 industry.

According to the latest count, nearly 580,000 additional airline seats will be added this year, creating the potential for another half a million visitors, which would require businesses to call more than 5,000 people back to work.

We will continue supporting our visitor industry while at the same time searching for other economic development opportunities both at home and abroad.

Among all the world's nations today, nowhere is the pace of economic activity more breathtaking than in China.

On my most recent visit, I was personally involved in kick-starting direct flights between Beijing and Honolulu, had substantive discussions on clean-energy partnerships, and signed an agreement to establish the first showroom for Hawaii products in Shanghai.

I will return to China in a few months to further strengthen our relationships and continue efforts to promote business opportunities for local companies.

We will join with business and cultural groups to celebrate Hawaii Week at the American Pavilion this June at the Shanghai World Expo and celebrate the 25th anniversary of our sister-state relationship with Guangdong Province, China's manufacturing center and homeland to most of Hawaii's residents of Chinese ancestry.

Being a state located in the middle of the Pacific Ocean, Hawaii faces greater challenges than most states with similar size populations.

Because of our geographic isolation, we must do more than merely wait for opportunities to come to us. ...

With a sense of our history and a focus on the future, my administration is forging closer ties with the People's Republic of China as well as reinforcing and strengthening ties with Japan, Taiwan, the Republic of Korea and the Philippines.

In China, as it has been in Japan and Korea, and is in most of Asia, relationships matter—particularly relationships between governments.

We will be hosting government officials and others from 28 different countries this fall at the Pacific Asian Energy Expo and Summit, the Asia-Pacific Homeland Security Summit and the International Women's Leadership Conference. ...

...It is vital for Hawaii to have a cohesive and ongoing international outreach strategy that is advanced by state and county governments, business leaders, public and private universities, and various NGOs (nongovernment organizations), including our ethnic chambers of commerce.

It is this kind of comprehensive and integrated approach that enabled our state to be chosen as the site of the prestigious 2011 APEC Leaders Conference. ...

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One of our most successful collaborations is the Hawaii Clean Energy Initiative.

The concerted actions of many, both in and out of government, have turned our over-reliance on foreign oil into the impetus for a clean- energy future and made us a global leader in our pursuit of energy independence.

Clean energy is critical for our overall economic well-being, our environment and our security.

And it is becoming an important and growing economic sector that will lead to high-quality, good-paying jobs for our residents.

This legislative session I am proposing a package of initiatives that builds upon the foundation of the Hawaii Clean Energy Initiative, including a ban on the construction of new power plants that burn fossil fuels.

It is time now to show the public by our actions that we will no longer allow our economic well-being to be dependent on burning oil and coal that must be shipped here over thousands of miles of open ocean.

Another proposal will grant a general excise tax exemption to renewable energy projects of at least 2 megawatts that are placed in service between Jan. 1 of 2011 and Jan. 1 of 2015.

In the transportation sector we propose a rebate of general excise taxes paid on electric and plug-in hybrid vehicles, as well as the charging stations that will make it practical and convenient to drive electric vehicles in our islands in the coming years.

These proposals and others will serve as effective incentives for investment in clean energy, create new jobs and make a clear public statement that clean, renewable energy is a state priority.

Finally, I am proposing that property owners across the state be empowered to help create a green jobs sector through the establishment of a new program called Hawaii Clean Energy Investment Bonds.

Similar programs, which already exist in 15 states, assist residential and commercial property owners with the upfront costs of installing clean energy systems or energy efficiency upgrades by allowing them to borrow the money from the state and then repay the loans over a period of years via an annual assessment on their real property tax bill.

This program spurs both immediate job creation and economic activity, and moves us closer to our goal of 70 percent clean energy by 2030.

The HCEI Bonds program to encourage a green jobs sector is just one of the economic recovery proposals my administration will be implementing in the months ahead.

Recognizing the economic and social imperative of getting people back to work, I am proposing a package of incentives, including help covering the costs of health insurance, and income tax credits for the creation of new jobs.

The income tax credit proposal grants credits equal to the wages withheld by the employer for each new, full-time permanent position filled by a resident who is currently receiving unemployment benefits.

Because we need jobs now, the tax credits will begin as soon as the law is passed and remain in effect through Dec. 31, 2012.

Businesses will be required to be operational for two years after their final tax credits are received.

Also, we will actively work to expand our SEE HawaiiWork program that currently reimburses an employee's wages and benefits for up to one year for companies that hire people off of the welfare rolls.

The expanded program will use federal stimulus funds to cover for six months parents who are collecting unemployment and whose household income does not exceed a certain level.

This program expansion does not require legislation and we will move now to get employers and employees the help they need to get back to work.

In addition, we will begin a program next month to allow workers on unemployment to volunteer their time at a business or nonprofit organization while still drawing unemployment benefits.

This program will give workers an opportunity to demonstrate their skills to prospective employers and also help businesses evaluate an individual before they incur the cost of hiring them permanently.

Because the construction and visitor industries have been hit especially hard during the downturn, and have the capacity to significantly stimulate the economy, we are proposing a 10 percent construction and renovation tax credit for hotels and resorts.

This credit will be granted for the first $500 million in construction work undertaken in each of the next three years, and has the potential to create more than 23,000 new jobs.

The cost of the credit will be more than offset by the economic activity generated.

We will also continue expediting our airports, harbors and highways modernization programs as well as other government construction projects.

And we will again propose legislation that places reasonable time limits on issuing construction permits for high-priority projects such as affordable housing, renewable energy and housing-related infrastructure.

At the same time we are moving forward with these job creation initiatives, nearly every business in the state is worried about scheduled increases in unemployment insurance taxes if the Legislature does not take quick action this session.

My administration has been working with legislators, as well as business and labor organizations, to develop legislation that will moderate any increases while returning solvency to the unemployment insurance trust fund.

Under our proposal, employers will pay only 60 percent of anticipated tax hikes, saving businesses $497 million over the next four years.

We believe strongly that anything beyond this 60 percent threshold will cause large job losses.

I urge the Legislature to enact this bill prior to mid-March when the Labor Department will need to send out the unemployment insurance bills to businesses across the state.

While I am spending most of my time this morning talking about important proposals to get our economy growing again, I also want to take a couple of minutes to thank members of my team for their important contributions to Hawaii during the past seven years.

We have been making progress in STEM education, renewable energy, film and television production and international partnerships, thanks to the creativity and hard work of Director Ted Liu and the entire DBEDT (Department of Business, Economic Development and Tourism) team, including their recent success in convincing Disney to film the next “;Pirates of the Caribbean”; film in Hawaii.

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(Acknowledges Cabinet members: Budget Director Georgina Kawamura, Comptroller Russ Saito, Transportation Director Brennon Morioka, Health Director Dr. Chiyome Fukino and Human Services Director Lillian Koller, as well as Lt. Gov. Duke Aiona, “;a trusted friend.”;)

I came into office seven years ago believing we needed an entirely new governance structure in order to realize meaningful improvements in student achievement, and I enter this final year more convinced than ever that continuing the status quo structure of our public school system will never produce more than mediocre results.

Despite consistently spending more than $2 billion a year on education, we have not achieved the kind of meaningful results any of us can be proud of, and we continue lagging far behind other states.

The recent public concern over furloughs is understandable, and I have made a generous and fair offer in an attempt to achieve a permanent solution to this situation.

But I ask everyone to be as concerned about the quality of education, as they have become about the mere quantity of education.

The time has come to focus not only on the number of days children are in class, but on what they are learning during those days.

The time has come for high school diplomas to mean that a student has the skills to be career- or college-ready rather than being a piece of paper signifying they sat in class a set number of years.

And the time has come for us to focus more on long-lasting systemic reform of public education than on temporary furloughs caused by the severest fiscal crisis in Hawaii's history.

Regardless of how quickly furloughs end, our school system needs structural reform.

The current school system lacks clear lines of authority, responsibility and accountability.

Because the governor, the Legislature, the Board of Education, the Department of Education, and the superintendent of education all have roles to play, the public does not know who to hold accountable for consistently mediocre performance.

If President Truman had analyzed our public school system, he might have said, “;The buck doesn't stop here, or there, or there—it just gets passed around and eventually lost.”;

I propose we offer our citizens the opportunity to vote on a constitutional amendment that makes the Department of Education a cabinet department with a superintendent hired by the next governor so all of us will know clearly “;where the buck stops.”;

It is time for Hawaii to make the governor accountable for public education.

If you want to see what can happen when the Governor's Office gets involved with just a single aspect of education, look closely at the success of our robotics programs, which are among the finest in the country.

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(Acknowledges robotics championship teams from Punahou and Hanahau'oli schools, Highlands Intermediate and McKinley High School. Also lauds University of Hawaii women's volleyball Coach Dave Shoji and his wife, Mary.)

I pledge to the people of Hawaii all my effort in moving our state into the best possible position before the next governor is sworn in later this year. ... I stand before you rededicated to the job ahead.

Mahalo nui loa, and God bless Hawaii and the United States of America.