Budget and Finance Director Gives Highlights of State Financial Plan-Before State House Committee on Finance, Jan. 14, 2003

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Mr. Chairman and Members of the Committee: I want to start by thanking all of you for your patience and understanding in allowing us the opportunity to present a new financial plan. We have been working very hard with all departments to make revisions that will reflect both our administration’s focus on fiscal discipline as well as the need to stimulate the economy. One of our basic tasks was to balance the budget without using the Hurricane Relief Fund. We believe the Hurricane Relief Fund should be maintained in order to ensure that the people of Hawaii will be protected following the next hurricane, which everyone agrees is a certainty. We have to be sure that the state of Hawaii will not be hampered during recovery efforts and that insurance will be readily available to homeowners and businesses. Also, we believe that to restore trust in government, this obligation must be fulfilled and the intent of the fund must remain intact. To achieve our goals while fulfilling this obligation we implemented a freeze on filling nonessential vacancies and requested a 5 percent reduction of discretionary expenditures for the remainder of fiscal year 2003. Exemptions were allowed for debt service, fringe benefit costs, costs associated with the Felix consent decree, University of Hawaii and Department of Education instruction and school level support, public welfare, and funding for child and adult mental health costs. Following is the revised MultiYear General Fund Financial Plan, which is based on January 2003 Council on Revenue projections. Please view this as our preliminary proposal as many details are still being worked out with individual departments and this plan may change during the session. However, I feel this is a good starting point for both the Legislature and the general public to begin to understand how we will achieve our goals of restoring fiscal discipline while at the same time delivering a wide range of quality public services. These are highlights of the financial plan for the current fiscal year 2003: *A net increase (from the December 2002 financial plan) of $22.0 million in non-tax revenues from the Council on Revenue September 2002 estimates. *Projected revenues include FY 02 carryover balances of $134 million; $2.0 million to be transferred from the Bureau of Conveyance special fund; and $18.1 million from bond premium proceeds. *Projected expenditures include: $179.4 million for approved collective bargaining raises; a total of $23.5 million for legislative claims and other specific legislative appropriations made in prior sessions for FY 03; proposed emergency appropriations totaling $40.8 million; and expenditures of $2.9 million for special election and vacation payout costs. *Expenditures are reduced by $39.7 million from 5 percent restrictions on the discretionary operating budget ($35 million) and restrictions on specific appropriations ($4.7 million). *Other reductions to expenditures come from debt service savings (series CZ) of $8.3 million, and from annual statewide lapses of $55.0 million. *For the upcoming 2003-2005 biennium and years to follow, our budgetary focus is on maintaining fiscal discipline and strengthening the economy in order to generate recurring revenue sources to meet recurring expenses. *These are our revenue and expenditure assumptions for FB 200305 (FY 04 and FY 05): A net increase (from the December 2002 financial plan) of $15.1 million and $15.0 million in nontax revenues from the Council’s September 2002 estimates for FY 04 and FY 05, respectively. *Projected revenues include $200,000 in FY 04 and $6.8 million in FY 05 for additional reimbursements to the Retirement System; $33.7 million in special fund transfers to the general fund in FY 04; and $5.5 million in each fiscal year from the assessment of special funds for central service expenses. *To ensure financial accountability, we are initiating repeals of selected special funds that have outlived their purpose, or have no justifiable purpose. Any balances, if available, are to be transferred to the general fund. *To ensure equitable fiscal responsibility, we will propose subjecting most special and nongeneral funds to central service assessments, unless prohibited by federal laws. *Other revenue adjustments will include several tax initiatives to be introduced by Gov. Lingle in her State of the State Address. Specific details of those initiatives will be released next week. Estimated revenue impact will amount to approximately $30.0 million in FY 05. *Projected expenditures over the biennium assume departmental budget requests that are limited to “no growth” ceilings (excluding fixed costs, and nondiscretionary costs such as welfare, education, health, mental health, fringe benefits, etc.), and the continuation of spending restrictions which will result in savings of $35 million per year. *Projected increases to FY 04 and FY 05 ceilings are reduced by $17.5 million and $17.2 million, respectively. *Other reductions to expenditures come from reduced debt service requirements based on revised issuance plans ($0.8 million in FY 04 and $3.8 million in FY 05), and from projected annual statewide general fund lapses of $55.0 million in each fiscal year. *Over the planning period FY 06 through FY 09, our revenue assumptions include continuation of the impact of tax credits and central service assessments; and projected general fund nontax revenue increases through FY 09 (net increases from the December 2002 financial plan of $15.9 million, $16.5 million, $17.4 million, and $18.8 million in FY 06, FY 07, FY 08, and FY 09, respectively). *On the expense side, we will continue strict spending policies and review our debt issuance plan to reduce debt service costs. I would like to reiterate that these proposals are preliminary, and subject to adjustment or change, as circumstances warrant. Operationally, we have already administratively implemented efforts toward structural reform of state government programs. FY 03 restrictions of 5 percent were imposed, and departments were directed to base their upcoming biennium and outyear budgets on this adjusted funding level. In addition, by instituting a freeze on the filling of position vacancies in selected areas, we expect to minimize and control growth, in all but essential areas of government service. At the same time, we are also reducing current and future capital improvement project authorizations to reduce the cost of debt that must be accommodated within current and future budgets, and to ensure that such costly, longterm obligations will be expended only for high priority program areas. At this time, I would also like to discuss the following matters: Revenue estimates of the Council on Revenues as of September 2002, and January 2003. The status of the constitutionallymandated state aggregate general fund expenditure ceiling; and the status of the statutorilymandated general fund appropriation ceiling for the Executive Branch (as of December 2002). The status of the General Obligation Bond Fund Debt Limit (as of December 2002). The status of Constitutional Rebate/Credit requirements (as of December 2002). Summary information on the Executive Biennium Budget for FY 04 and FY 05 and General Fund Financial Plan as of December 2002 is attached for your information. Revenue Estimates of the Council on Revenues as of September 2002, and January 2003 The previous administration’s general fund financial plan for fiscal year 2003 and for the ensuing fiscal biennium 200305, were based on the constitutionallymandated Council on Revenue’s (Council) September 2002 revenue projections. On January 8, 2003, the Council retained its September 2002 general fund tax revenue growth rate forecast, which assumes that there will be no longterm major strikes, losses due to decreases in federal allocations, ill effects from a war in Iraq, unforeseen adjustments to tax laws, or other unanticipated occurrences. These latest revenue estimates must be considered when appropriating funds and enacting revenue measures. That forecast calls for continued growth in current fiscal year 2003 revenues with an anticipated increase in general fund tax revenues of 6.1 percent from the negative 3.5 percent base recorded for fiscal year 2002. As of the Council’s September 2002 forecast, and as reiterated by January 8, 2003 Council estimates, tax revenues were projected to increase from FY 03 to FY 04 by 5.7 percent, by 6.0 percent in FY 05, and by 5.1 percent, 5.2 percent, 5.0 percent, and 5.0 percent in fiscal years 2006, 2007, 2008, and 2009, respectively. While general fund tax revenue projections remained unchanged, nontax revenues which were not accounted for in the December 2002 Program and Financial Plan, General Fund Financial Plan are projected to increase from September 2002 estimates by $20.7 million in FY 03, $15.1 million in FY 04, $15.0 million in FY 05, and $15.9 million, $16.5 million, $17.4 million, and $18.8 million in FY 06, FY 07, FY 08, and FY 09, respectively. As required by statute, the following declarations on the general fund expenditure ceiling, the general obligation debt limit, and tax rebate requirements, are based on budget recommendations of the previous administration. New calculations will be submitted with recommendations of this administration, as warranted. The status of the constitutionallymandated state aggregate general fund expenditure ceiling; and the status of the statutorilymandated general fund appropriation ceiling for the Executive Branch. State aggregate general fund appropriations proposed as of December 2002, which included executive appropriations, requirements of the Judicial and Legislative branches, and the Office of Hawaiian Affairs, amount to $3,931.2 million for FY 03, $3,936.6 million for FY 04, and $4,069.4 million for FY 05, which are within the constitutionally mandated expenditure ceilings for FY 03, FY 04, and FY 05, respectively. Total recommendations included in the executive budget request of December 2002, have also been made in accordance with the appropriation ceiling for the Executive Branch pursuant to provisions of section 3792 of the Hawaii Revised Statutes. Funding proposed as of December 2002, for emergency program requirements in health and human services, and other state programs, will result in the appropriation ceiling for the Executive Branch to be exceeded in FY 03 by $52.9 million or 1.4 percent. Executive Branch appropriation ceilings for both FY 04 and FY 05 will not be exceeded … . The status of the constitutional general obligation debt limit. Pursuant to Section 13, Article VII of the Hawaii State Constitution, and based on the assumption that interest rates on proposed bond issuances will be issued at 6.0 percent, it has been determined that the principal and interest calculated on all bonds issued and outstanding, estimated for all bonds previously authorized and unissued, and on the bonds proposed as of December 2002, in the previous administration’s executive budget for the FB 200305, will not cause the debt limit to be exceeded at the time of each bond issuance … . The Status of the constitutional Rebate or Tax credit requirement. Section 6, Article VII of the State Constitution provides for a mandatory tax refund or credit if the general fund balances at the close of two successive fiscal years exceed 5 percent of general fund revenues for each of those two fiscal years. Although the general fund balance at the end of FY 01 exceeded 5 percent of general fund revenues, FY 02 fund balances as of December 2002, did not. Accordingly, the 2003 Legislature will not need to provide for a tax refund or tax credit for the 2003 tax year. The Executive Biennium Budget for FY 04 and FY 05 (as of December 2002) … . Total operating budget requests proposed as of December 2002 (including all means of funding), for the Executive Branch amounted to $7,463.3 million in FY 04 and $7,717.0 million in FY 05, for a total of $15,180.3 million over FB 200305. Proposed general fund operating appropriations for the biennium are $3,770.7 million for FY 04 and $3,904.5 million for FY 05. The proposed capital improvements budget for the Executive Branch as of December 2002, amounts to $964.5 million in FY 04 and $621.6 million in FY 05, for a total of $1,586.1 million over the biennium. Of this amount, $1,120.1 million was proposed to be funded over the two years of the biennium by general obligation bond funds, and $7.3 million to be funded by reimbursable general obligation bond funds. That concludes my presentation. During the course of the 2003 Session, departments will be providing specific information with regards to their individual programs and budgets. Should our planned financial outlook change, we will be sure to keep you informed. Likewise, should the Council on Revenues’ estimates for March change markedly from current estimates, we hope you will work with us to make appropriate adjustments. Again, I want to thank you for this opportunity to provide information on our revised financial plan and for your patience and understanding regarding the timing challenge that our new administration faced in preparing this plan.