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Our state’s economy is in trouble

Updated: Sep 16, 2020

Hawaii did very well to avert a health crisis, and we are fortunate to have experienced the lowest rate of infection and COVID-19 related death in the country. Not surprisingly, this success comes at a remarkably high financial cost. A two to three month lock down was never going to be easy on business activity, personal income, or tax revenues, but our state finances are in far worse shape than most people realize.

The Legislature recently amended the state budget to close a projected one billion dollar budget shortfall. Unfortunately, tax revenues have continued to collapse even farther. State general funds needed to pay for government are approximately $677 million per month, and last month’s tax receipts were a whopping $400 million short.

The Budget Director reported to the Senate Ways and Means Committee, “More than likely, the State will not be able to afford the current level of programs and services it provides. We believe that difficult budget choices will have to be made.” The economic impact of the COVID-19 pandemic could likely lead to a bond ratings downgrade and higher interest costs to the state.

At the projected burn rate of hundreds of millions per month, the state will have severe cash flow issues by the end of 2020. The options are not good. The Governor is authorized to borrow $2.1 billion from the federal government, but it is hard to imagine how the state could pay it back. Even with this emergency financing, furlough days are not out of the question.

Social, medical and emergency services, housing rental assistance, education, public safety, and other critical state functions could be impacted. The state cannot function without tax revenue and there is no tax revenue when business is closed. Many formerly tax paying businesses will not survive this pandemic, and recovery of the visitor economy is uncertain.

It is no secret the state unemployment office failed to timely process more than 230,000 applications that overwhelmed its outdated DOS-based mainframe. Nearly three months into this crisis, thousands of unemployed workers are still waiting. After state unemployment funds are exhausted in June, the federal government will lend $1.3 billion, enough to continue unemployment payments for about three months. This bill will not be easy to pay back either.

I am sorry to be the bearer of this bad news, but the public should know the seriousness of this financial crisis. Small businesses have paid an especially heavy price, personal savings have been destroyed, the unemployment numbers are staggering and long lines at food distributions are an ominous sign. And the state is facing its biggest financial challenge ever.

Fortunately, there is very little incidence of the coronavirus in Hawaii and most businesses have been released to return to work. Let’s hope they can make it through the next few months with social distancing and other new safety considerations. By the time you read this, the Governor should have removed the inter-island travel quarantine. We most definitely need to get our local economy working as soon as possible.

Opening up Hawaii to thousands of incoming visitors remains the greatest challenge. Nobody wants an influx of COVID positive tourists. Whether or not pre-boarding health checks can be implemented or if the incoming quarantine can be effectively maintained, the new incoming passenger screening and identification protocols may be invaluable for future contact tracing and protecting our health.

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