To see the state budget in action, look to the executive branch. The budget for this branch of government supports an array of essential health and social services, business development, environmental protection, and education, from kindergarten to university, through spending. It is made up of the base budgets for each department, capital improvements, and one-time appropriations. It authorizes funds for salaries, pensions and other benefits, facilities, contracts, and debt service. A snapshot view of each department that describes primary functions, budget, and staff is included in the appendix to the “Hawaiʻi Budget Primer,” available for download here. In this post, we will review the various aspects of the Fiscal Year (FY) 2019 budget, which covers the time period between July 1, 2018, and June 30, 2019.

[Related: “Highlights from Governor Ige’s proposed state budget for 2019-21.”]

Detailed information about the ongoing base budget for the executive branch is included the budget bill. The resources and staff rolled up in the budget bill can also be found in the budget worksheets available at the “Legislative Information” page on the Legislature’s website.

The allocation of revenues expresses the priorities of state policy-makers and underscores the ways in which Hawai‘i’s program financing differs from other states. For example, Hawai‘i’s general fund covers functions that are typically supported by local governments in other states, including education, public health and welfare, hospitals, and penitentiary systems. Hawai’i’s Legislature also indicates priorities by creating special funds that are restricted to supporting related expenditures. Figure 5.1 compares Hawai‘i’s spending to the U.S. average. The large “all other” category includes significant state expenses such as interest payments, housing, economic development, recreation, and general administration.

 

The executive budget is the state’s largest budget, accounting for 99 percent of state spending, according to our analysis of FY2019 budget worksheets and appropriations bills passed in 2018. The total FY2019 executive branch budget amounts to $17.3 billion. This sum is made up of:

  • $14.4 billion for the operating budget, the base budget reflected in budget worksheets and the budget bill;
  • $481 million approved in separate one-time appropriations bills; and
  • $2.4 billion for the capital improvement project (CIP) budget.

The array of funds that supports the total executive budget varies somewhat from those that support the operating base budget (Figure 5.3 and Figure 5.4). The most significant difference is the addition of capital improvement projects funds to the total budget. Because CIP funds pay for capital projects, they are not part of the base budget.

Executive Operating Budget

Representing ongoing departmental resources, the operating budget is comprised of:

  • General funds: $7.5 billion;
  • Special funds: $2.9 billion;
  • Federal funds: $3.0 billion; and
  • Other funds, including trust funds, interdepartmental transfers, and revolving funds: $989 million.

The ongoing operating budget for the executive departments is the base upon which the Legislature adds or subtracts funds to form future-year budgets. This base accounts for 83 percent of the FY2019 executive expenditures, with the remaining 17 percent being for capital improvements or other one-time appropriations.

Figure 5.5 shows the distribution of the base operating budget among programs, but it is notable that these departmental operating expenses do not include employee benefits (such as health insurance, social security, retirement, and other post-retirement benefits) or debt service. These excluded expenses, which total more than $2.7 billion, are instead included in the budget of the Department of Budget and Finance.

In addition, capital and facility costs for all departments, except for public education and the University of Hawai‘i system, are shown in the Department of Accounting and General Service budget. This method of allocation masks state operating expenses by department by under-reporting costs for all except Budget and Finance, whose budget is inflated.

Executive Branch Staff

Staff are a major part of each state department’s budget. The executive branch is authorized to employ 46,174 permanent employees plus 3,955 temporary full-time equivalents (FTEs) for a total of 50,129 positions. Hawai‘i’s statewide Department of Education has, by far, the largest number of staff, with 20,697 permanent and 2,168 temporary staff (Figure 5.6). The Department of Human Resources Development, which supports the state’s personnel needs, has the fewest at 98 FTEs.

Executive Operating Budget: Then and Now

In the 10 years between fiscal years 2009 and 2018, the overall executive operating budget increased by 31 percent from $10.8 billion to $14.1 billion. Much of the increase is attributable to inflation and population growth, as well as changes in the economy (2009 was a recession year) and changes in tax policy. Between 2009 and 2017, inflation-adjusted per capita expenditures increased by 9 percent.

The changes in spending by department illustrate shifts among competing priorities. In the 2009 to 2018 span, the department experiencing the greatest growth was Human Services with a gain of $1.6 billion (up 84 percent). Health’s budget increased by 24 percent, with the addition of $356 million dollars and transportation added $328 million, for a 48 percent gain.

The operating budgets of several smaller departments grew by large percentages, but less dramatic dollar amounts: Hawaiian Home Lands by 109 percent ($27 million), Commerce and Consumer Affairs by 76 percent ($36 million), and Labor by 58 percent ($173 million).

It appears that the operating budget for the Department of Budget and Finance grew by nearly $974 million (58 percent) during this period, but this increase is due largely to changes in budget allocation processes. In 2009, fringe and debt service payments for Education and the University of Hawai‘i system were reflected in those two departments’ budgets, rather than being included in the Department of Budget and Finance, where they are now. When the fringe and debt service payments for Education and the University are subtracted from the Department of Budget and Finance and added back to those departments in 2018, it shows that Education grew by $189 million (7.5 percent) and UH by $263 million (23 percent), while Budget and Finance increased by a more modest $102 million (6 percent). The governor’s and lieutenant governor’s budgets are the only ones smaller in 2018 than in 2009, with a decline in their combined budgets of more than $1 million.

Payment Obligations

Before any other spending decisions, the Legislature has to address the state’s non-negotiable obligations. These costs go to:

  • Debt service;
  • Health benefits for employees and retirees;
  • Mandated payments for accumulated retiree health costs;
  • Contributions to the pension fund and social security; and
  • State share of Medicaid match.

Except for Medicaid expenses, which are included in the budget for the Department of Human Services, the costs named above are allocated to and expended by the Department of Budget and Finance.

Although described as “fixed” costs by the Department of Budget and Finance, the required sums depend on factors related to each kind of expense. For instance, the amount of state Medicaid match varies by the number and category of aid of enrollees. As shown in Figure 5.8 and Figure 5.9, these items are part of the executive base budget and consume more than $3.6 billion, or 47 percent of all general funds.

Trends projected for these obligated costs are shown in Figure 5.10 and Figure 5.11. These include an increasing percentage of general funds, from 43 percent in FY2010 to 47 percent in FY2019, expended for obligated costs.


Health and Retirement Benefits

Among Hawai‘i’s obligated costs noted above are pension and retiree health benefits for state and county public worker retirees. The Employee Retirement System (ERS) manages pension payouts and investments while the Employer-Union Health Benefits Trust Fund (EUTF) manages active and retiree health and other benefits. The latter are often called “other postemployment benefits,” or OPEB.

Hawai‘i’s pension and OPEB obligations are frequently referred to as “unfunded liabilities,” which means that state obligations for pensions and OPEB exceed the amount of money in their respective trust accounts. According to the ERS actuarial valuation for the year ending June 30, 2017, “the funding period for paying off the UAAL” (unfunded actuarial accrued liability) is 26 years. The report states that the unfunded actuarial accrued liability totals $12.9 billion and the funded ratio, that is, the value of assets compared to accrued liability, is 54.9 percent. A similar report for EUTF for July 1, 2017 revealed an unfunded actuarial accrued liability for OPEB of $12.15 billion and a funded position of 12.8 percent.

Hawai‘i’s retiree systems shortfalls can be attributed to several factors, one of which is increasing retiree longevity. According to the ERS report cited above, general retirees at age 65 can expect to live another 23.2 years if male and 26.4 if female. Another reason for the shortfall is that legislators in the past failed to fund retirement and OPEB accounts adequately, according to Thomas Williams, the executive director of the Employees’ Retirement System of the State of Hawaiʻi.

Steps have been taken to ameliorate unfunded liabilities: HB546 (Act 268) was passed in 2013  requiring accelerated state appropriations to amortize the OPEB debt, and in 2017 SB936 (Act 17) increased the pension pay-in to catch up on liabilities. According to Kalbert Young, former director of the Department of Budget and Finance, this prudent but painful strategy to reduce the unfunded liabilities decreases future funding requirements, provides an income-generating base, and earns the state a better bond rating and lower interest rates on borrowing (April 13, 2018).

Figure 5.12 and Figure 5.13 use data from the Department of Budget and Finance’s “Budget in Brief (FY2019) to show past and expected appropriations from the general fund for pension and OPEB obligations.

Capital Improvement Projects

The executive branch CIP budget, totaling $2.4 billion for FY2019, allocates funds to one-time departmental infrastructure and improvement projects. Departments have very different capital project needs (Figure 5.14). Two-thirds of all capital funds are allocated to the Department of Transportation for airports, roads, harbors, and similar purposes, while a number of other departments have no capital projects. The CIP budget, which is much smaller than the operating budget (Figure 5.15), is largely financed by bonds.

Grants-in-Aid

The Legislature appropriates grants-in-aid (GIA) to non-governmental entities. Applications and instructions are available on the Legislature’s website’s “Legislative Information” page. Eligibility for and management of grants are governed by Chapter 42F of the Hawai‘i Revised Statutes. There is no requirement that applicants be nonprofit organizations but nearly all are. According to Chapter 42F, the only restriction is that a grantee must be incorporated in the state of Hawai‘i (Hawai‘i Revised Statutes § 42F-103).

The grantee may receive funds for operating or capital needs or both. Operating grants are appropriated from general funds, while capital grants are typically funded by general obligation bonds. The total appropriated to GIAs varies every year, based on funds available after other spending agreements have been reached. Grants appropriated for FY2019 amounted to nearly $30 million, with 65 percent going to capital and the balance to operating grants. Both the legislative GIA worksheet summary and the budget bill note the department and program to which each grant is assigned. Notwithstanding the Legislature’s award of grants, the governor has full discretion to withhold, reduce, or delay release of funds (Hawai‘i Revised Statutes § 42F-107).

Other Appropriations Bills

In addition to the budget appropriations bills approved by the Legislature to fund OHA and the executive, judiciary and legislative branches, the Legislature passes multiple targeted appropriations bills that provide funding for projects and government responsibilities. The sums appropriated this way can be substantial, as these are the bills that, among other things, fund collective bargaining obligations and pay claims against the state.

Appropriations cannot be made to non-governmental entities; instead, with rare exceptions, the bills are allocated to executive departments for expenditure (for FY2019, one appropriation bill funded a project in the legislative branch and another went to the City and County of Honolulu, but to support a Department of Education need).

Appropriations bills passed for FY2019 totaled $481 million and included $230 million for affordable housing, more than $30 million for services for homeless people, $125 million for flood relief, and $8 million for claims against the state. Appropriations bills are funded largely by general and special funds.

Bond Issues

The legislative budget process also involves the authority to issue bonds. For FY2019, $70 million was authorized for special purpose revenue bonds and $2 billion for general obligation bonds, both to be managed by the Department of Budget and Finance. The University of Hawai‘i will manage the $100 million that was appropriated for university revenue bonds.

Other Budgets

Budget information is available on the Legislature’s website that details the budgets for the other branches of government, namely, the judiciary, the Office of Hawaiian Affairs, and the Legislature. The bills passed that appropriate funds to the judiciary and OHA are reflected in analogous budget worksheets, which can be found on the state Legislature’s website under “Legislative Information.”

For FY2019, a supplemental budget year, the judiciary budget is SB2150, but there is no supplemental budget for OHA. Its budget for FB17-19 was passed in 2017 as HB335.

The Legislature’s appropriation bill is typically the first one approved and signed by the governor  every session. For FY2019, this is HB2600 (Act 1). The Legislature’s budget supports legislative operations, the state auditor, the Legislative Reference Bureau and Public Access Room, the ombudsman, and the state Ethics Commission. Unlike the budgets for all other branches of government, the Legislature’s budget bill is not accompanied by worksheets that detail appropriations and authorized staffing.