Balancing Tax Relief with the Need to Rebuild Honolulu

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The reaction by homeowners to the announced increase in real property tax
valuations has been understandable. The hot housing and condominium market
has been wonderful for homeowners who’ve enjoyed rising asset values, home
sellers, the real estate industry, developers, and the construction
industry. But the resulting jump in property tax valuations has had its
most severe impact on islanders who’ve lived in the same home for
decades, and particularly those on fixed incomes.

My administration is very sensitive to the financial pressures property
taxes are having on many in our community. Although our present tax rates
were established well before I took office, to grant relief we’re offering a
number of proposals, some that provide immediate relief and others that take
a longer-term approach to our tax policies.


”Tax Credit:” My administration is proposing to cut taxes by $40 million-a
third of the additional revenue we expect to receive. How this tax cut is
to be apportioned will be determined during the next several months, in
consultation with the City Council. But rest assured our priority will be
longtime owner-occupants. If approved, the cut would be effective this

If every homeowner were to receive the same tax cut, it would be the
equivalent of having an additional $80,000 exemption, on top of the standard

”Homeowner Class:” My administration will seek legislation to create a new
“homeowner” classification of property, just as our sister counties have
done. As we have seen on the Neighbor Islands, this category will reduce
tax rates for owner-occupants, as well as distinguish the owner-occupant
from other classifications of property owners or those who are purely
speculators. We hope to have this new classification in place through
legislation by July 2007.

”Reserve:” We will insist on creating a financial reserve to ensure the
fiscal stability of the City government. While we continue to believe a
reserve of 5 to 8 percent of our annual operating budget (roughly $50-80
million) is necessary, we’re willing to build that fund over time. So,
rather than our original proposal of $50 million (by comparison, the
governor is proposing a $110 million State reserve), we’ll set aside $20
million this coming fiscal year and add to that in subsequent years. This
savings account is absolutely essential if the City is to survive a
Hurricane Katrina-type disaster, a plunge in the economy like we experienced
in the aftermath of the Gulf War and September 11 attacks, or unfunded
mandates and lawsuits. It also improves our bond rating so that we can
reduce the amount of interest we pay on our debt.

”Tax Policies:” Perhaps we need to examine our tax system. Therefore, I am
appointing a Mayor’s Tax Policy Committee, which will consist of private
sector economists, tax experts, and business leaders. The committee will
work with the City Council to pursue sound fiscal management and
accountability policies.

Why can’t we offer a bigger tax cut? Why not give back more?

We need to be reminded of the fiscal predicament my administration
inherited. The City is suffering from the hangover of years of fiscally
irresponsible spending, and will continue to suffer for years to come. Many
of the problems and obligations we face today were created by years of
profligate spending. Rather than fix the roads, the City built water

Rather than repair an aging sewer system, the City diverted your
sewer fees to construct expansive playgrounds and install hand-chipped
cobblestones in Chinatown.

As we reported in February 2005, the previous
administration deferred $925 million in debt service and operating expenses,
such as repairs, equipment, technology, and the basics of City government.

It raided our special funds, i.e., funds designated to pay for specific
expenses. It shifted money set aside for capital improvements to offset
daily operating expenses. The City now owes its creditors $3 billion, or
$3,000 for every man, woman, and child on this island.

The proposed tax cut of $40 million and the reserve of $20 million account
for roughly half the additional $125 million we expect to receive this
coming fiscal year. The reason we can’t offer bigger tax cuts is because
the remainder is committed to the following fixed costs:

*Increase in debt payments owed by City, $16 million

*Increases in fuel and salaries for TheBus, $10 million

*Previously negotiated and approved salary increases for public safety employees (police, fire fighters, emergency medical personnel, etc.), $15 million

*Previously negotiated and approved salary increases for other City employees, $24 million

The City has these obligations while continuing to struggle with an
under-funded road repair and maintenance program, fire stations in disrepair
and fire engines that have long outlived their replacement dates, parks and
public facilities desperately in need of fixes, and severe manpower
shortages, particularly in key maintenance and engineering fields. While we
attempt to catch-up with these long-deferred obligations, our problems are

Our fixed costs and annual debt service-fueled largely by years of unchecked
spending on nice-to-have, not need-to-have construction projects-are rising.

Thanks to some disciplined fiscal management, we expect to make ends meet
for the current fiscal year (which ends June 30) and the next. But
beginning in 2009, our deficit will climb. The City will be $15 million the
red in 2009, $92 million in 2010, $137 million in 2011, and $174 million in

We are attempting to repair the damage. We have redirected our resources at
fixing our roads and sewers and public facilities. We canceled the Bus
Rapid Transit project, Waikiki Natatorium renovation, dozens of construction
projects, and encouraged private sponsorship of Sunset and Brunch on the
Beach events. You can expect us to continue to cut unnecessary spending and
emphasize public-private sponsorships, whenever possible.

But Honolulu will not be rebuilt overnight.

Our challenge is to meet the needs of today and make up lost ground on
long-deferred repair and maintenance, while capitalizing on opportunities to
improve our quality of life. Our goal remains to make the City and County
of Honolulu the best place to live, work, and raise our families.

I will be working with the City Council and reaching out to the community to
discuss the City’s financial situation, our current needs, and our many
long-term obligations. Until we have those discussions, I ask that you bear
in mind that changes to the property tax rates must be balanced against
their near- and long-term impact on the everyday services you receive from
the City.

”’Mufi Hannemann was elected to office of the Mayor in 2004.”’