Managing state spending during hard times is, well, hard; but the Great Recession has clear lessons about what services are just too critical to cut.

 

In 2009, in the midst of the most severe economic recession in recent history, the state government was faced with difficult decisions over the one-two punch of tightened budgets and expanding social safety needs. The Lingle Administration elected to cut state worker hours—notably, including school days—in order to save money. The resulting policy, dubbed “Furlough Fridays” in the media, disproportionately disrupted the lives of working-class families just when they needed help the most.

Angry parents, with children in tow, demanded a meeting with the governor. She refused to see them, so they began camping out in the lobby of the governor’s office. The media coverage of parents refusing to leave the office, and then being arrested, became symbolic of the repercussions of poorly planned service cuts during economic bad times.

While the administration’s handling of the pushback from parents was anything but stately, the initial decision to make those cuts was by no means an easy one. Which is why it is important to revisit the “Great Recession.” We need to understand what happened so we can be prepared to make smart financial decisions when the economy, once again, faces a destabilizing contraction. In an earlier post, we looked at the recession’s effect on jobs and the economy.

In this post, we’ll look at the effects of economic slowdowns on tax revenue and government budgets, and how the state can do a better job of managing its spending policy during the next downturn.

The Role of Government in Community Investment

Government spending decisions have a big impact on how well we, as a community, weather a recession. In fact, these decisions are just as important to the state’s post-recession economy and the long-term well-being of residents as they are to withstanding the actual recession.

In 2009, tax revenue was $525 million less than in 2008. This half-a-billion dollar reduction was duplicated in 2010. It wasn’t until 2012 that tax revenues exceeded the 2008 total. As a result, despite stimulus money from the federal government, between 2010 and 2011 the state budget likewise declined by more than half a billion dollars. That amounted to $400 less for every person living in Hawai‘i.

The resulting cuts, which included a reduction in student class time by nearly a month during the 2009–10 school year, a slashing of behavioral health services, and a shrinking of essential services provided under contract by nonprofit agencies, have created long-term consequences for the state.

The state may have to cut its budget, but not all budget cuts are equal. Some services are essential and need full support, and diminishing them through across-the-board reductions could end up making matters worse for Hawai‘i residents in the long run, or make it more difficult for people to get back on their feet once the recession ends.

For example, Furlough Fridays for schools was a particularly calamitous decision. This action hurt a greater number of people than did shuttering some other departments for three days out of each month, or 36 days, during that same period. Likewise, certain programs, such as government-supported mental health services, are more essential in the event of an economic decline, despite strained public resources. Other than increasing Medicaid support, Hawai‘i did not do well by this measure during the last recession.

The state largely met its goal of retaining its workforce. This was a generally sound principle, but it resulted in passing along bigger budget cuts to nonprofits that provide direct services under contract with the state. Hawai‘i’s Department of Health and Department of Human Services, together, cut more than $25 million in such services during the fiscal biennium 2010–11. As a result, crucial services provided with great efficiency were lost, and the nonprofit agencies that deliver these services were forced to lay off their employees.

Now is the time for the administration, legislators and community leaders to engage in sober discussion and planning for state action to address the next recession. This is necessary to ensure support for the most vulnerable and emerge with a stronger economy. The need for public services will likely increase during a recession, including public health insurance and behavioral health care. Nonprofit health and human services providers that deliver cost-effective essential services on behalf of the state should be prioritized, rather than getting the first and most extensive cuts.

The Recession’s Effect on Revenues

Taxes are collected on income, sales, hotel rooms rented, and other economic activities. Given the decline in these economic activities, it is no surprise, then, that state tax revenues dropped during the recession.

Most state taxes go into the general fund, which supports about half of all expenses. In Fiscal Year (FY) 2009, tax revenues declined by 10 percent and were flat the following year. The state’s largest source of revenue, the general excise tax (GET), dropped by 8 percent in 2009 and another 4 percent in 2010. A 10 percent decrease in tax collections, based on FY2018 revenues, would amount to $790 million in lost revenue today.

Some individuals and businesses reduce their tax debt by qualifying for a variety of tax credits. The amount of revenue lost to tax credits during fiscal years 2007–2010 is not reported but, in FY2011, tax credits amounted to more than $277 million, equal to 5 percent of all taxes collected. More than half of those credits applied to renewable energy activities and high technology business investments. The size and effectiveness of tax credits should be reviewed in the event of another recession so that state revenues are not unjustifiably reduced.

Oftentimes, recessions are only recognized once they are already underway. During the downturn in 2007, Hawai‘i was in the middle of FY2008. The legislature met in January 2008 and heard a forecast of mildly reduced growth from the Council on Revenues. It then crafted a budget for FY2009 that reflected the expectation of continued moderate growth. Because the state budget plans for a future period based on revenues from a past period, it can be out of sync with an economic downturn, or recovery. In this case, tax and budget reductions were not reflected until FY2010 and FY2011. With this in mind, state government should develop a plan of action in the event of a recession, and the administration should have the authority to implement it even when the legislature is not sitting in session.

Finally, the American Recovery and Reinvestment Act of 2009 (ARRA) provided short-term funding intended to stimulate the economy. It was to be used to support “shovel-ready” capital projects and programs that would create more jobs and provide essential services. ARRA significantly stabilized the state budget during the recession. Between FY2010 and FY2012, it added $1.5 billion to state budget resources.

Most executive departments received ARRA funds, but the largest supplements went to human services, labor and education. Some of these funds paid for capital needs, such as electronic medical records for the Hawai‘i Health System Corporation and a new telecommunications system for the Emergency Medical System. However, most of the stimulus money replaced or added to on-going state service programs.

In an era of growing federal deficits and uncooperative partisanship, it is uncertain whether a program such as ARRA would be available during a future recession. Without federal assistance, state budgeting could face a much greater crisis than it did in 2009 and 2010. And even with the benefit of federal funds from ARRA, the state budget was still reduced by 5 percent in FY2011. A 5 percent cut in the budget, based on FY2019 spending, would amount to $720 million dollars.

Managing Costs During Hard Times

The state’s largest expenses are for salaries, fringe benefits and other “fixed costs.” These are not easily trimmed during a recession. To help offset recession-related budget cuts, Hawai‘i has been building “Rainy Day” funds over the past decade.

A large portion of state spending goes to its workers, but reducing the budget by laying off staff would add to growing unemployment rolls and pose political challenges. With successive downgrades on economic expectations coming from the Council on Revenues, then-Governor Linda Lingle and the Hawai‘i State Legislature agreed to a three-day per month furlough on executive branch employees for the fiscal biennium starting July 1, 2009. Teachers, who did not work year-round, had to take 17 furlough days.  This is what led to “Furlough Fridays,” noted above, which deprived every public school student of the equivalent of a month of irrecoverable instructional time, and forced parents to scramble to access and pay for day-care or other services and programs to take their children while they were at work.  The furlough plan was expected to save $688 million, or 8 percent of payroll costs, over the two-year period.

The school furlough crisis was resolved in May of 2010 with an agreement to take money from the Hurricane Relief Fund to restore instructional days.  Furlough Fridays lasted another year for state workers not involved in education. At that time, state workers agreed to take a 5 percent pay cut in exchange for six extra paid hours of leave per month.

Furloughs were designed to preserve jobs through reducing paid hours, but this could also have a negative effect on retirement benefits, which are based, in part, on calculating highest earnings over several years. As a result, some employees voluntarily left state employment. In 2010, the number of public worker retirees increased by 4 percent, the largest one-year exodus to-date. The number of employees vested in the public retirement system (that is, qualified for retirement benefits but not currently employed by or retired from public service) increased by 15 percent. Between 2009 and 2011, more than 3,300 experienced public workers retired or left employment, leaving the state with a gap in expert leadership.

State jobs declined by 3 percent between FY2009 and FY2011, but rebounded in FY2012. Jobs in county government grew slightly, and federal jobs increased by 5 percent during the same period.

“Fixed” costs are growing, as a proportion of the state’s budget. Such costs are typically accounted for in the budget before any other decisions are made, and this complicates budget allocations when needs go up and revenues go down. Fixed costs are composed of the state’s share of Medicaid, debt service on bonds for capital projects, and employee and retiree benefits. In FY2007, fixed costs consumed 40 percent of all general funds.

In the budget for fiscal years 2020–21, fixed costs are expected to take up 50 percent of general funds. During a recession, tax-dependent general funds would shrink but trimming fixed costs would be more challenging. This means there could be less money available for the state’s many other priorities and obligations. Other options might exist to reduce fixed costs, however. During the “Great Recession,” the administration renegotiated debt service payments, resulting in significant savings in 2010 and 2011.

Hawai‘i’s budget reserve (that is, the “Rainy Day” fund) currently amounts to $376 million. At 2.6 percent of FY2019’s $14.6 billion operating budget (for all branches), this amount would cover just nine days’ worth of spending.

We Have Yet to Recover from These Deep Community Cuts

Consistent with the increase in needs for government assistance during a recession, most notably with the growth of Med-QUEST (Medicaid), the budget of the Department of Human Services (DHS) generally increased between the FY2007 baseline year and FY2012. However, essential supports for families and people with disabilities were reduced, and contracts with nonprofit service providers were cut by $2.5 million in FY2010 and by another $1.4 million in FY2011.

DHS lost 150 staff positions, while furlough savings amounted to $13.5 million. Between FY2010 and FY2011, the overall DHS budget relied on ARRA and other federal dollars to meet increasing program needs. Some programs traded reduced state resources for increased federal dollars. In FY2010, ARRA supported 10 percent of all DHS spending.

DHS reduced funding for health care payments, cash supports for families, and services for low-income and disabled adults by $107 million.  It cut nonprofit provider contracts for childcare, protective services, youth programs and other services by nearly $4 million.

Continuity in public health services must be a priority, especially during a recession when the needs of the public increase and members of affected communities are most vulnerable. The Department of Health (DOH) receives a smaller portion of its funding from the federal government compared with DHS, but DOH was able to increase its reliance on special funds, such as tobacco settlement funds and service fees.  Nevertheless, ARRA funds were still important to DOH, adding 5 percent to its budget in FY2011.

In FY2011, DOH’s budget was cut by $163 million. Nearly 300 positions were eliminated, and furlough savings amounted to $13 million.

Reductions in resources for behavioral health services were especially harsh during the recession. Between FY2009 and FY2011, the DOH’s behavioral health budget lost $33.6 million, resulting in drastically reduced community services for adults suffering from mental illnesses. These reductions adversely affected counseling and day health services that provide stability, help people take their medications correctly, and prevent worsening health. Group homes sheltering adolescents and adults with behavioral health needs closed, leaving few long-term living options and contributing to worsening rates of homelessness.

The behavioral health service reductions included more than $11 million in nonprofit provider contract cuts over the fiscal biennium. Another $12 million was cut from other contractual services provided by nonprofits, including the elimination of the Healthy Start program, a home visiting program intended to prevent child abuse and neglect.

Behavioral health cuts have had lasting consequences in our communities. Between 2009 and 2011, the State Hospital saw a 7 percent increase in patients while community mental health services (which include assessment and eligibility determination) dropped by 34 percent. Unfortunately, behavioral health service cuts did not stop with the recession. Today, Hawai‘i spends 23 percent less per state resident on behavioral health care than it did in 2006, while the number of patients at the state hospital has increased by more than a third.

Special funds increasingly supported the DOH budget during the recession. This was accomplished by raising spending ceilings, collecting more fees, and transferring funds, among other actions. Between FY2009 and FY2011, the Hawai‘i Health System Corporation’s special funds, most of which come from patient service revenue, increased by more than $100 million. Family Health Services special funds increased by nearly $10 million, and the special funds supporting the Emergency Medical Assistance budget grew by $6.8 million. On the other hand, special funds supporting the Adult Mental Health Division and Child and Adolescent Mental Health Division were cut by $11 million, largely because they were providing fewer services.

Cuts to the important services provided by the Department of Labor resulted in delays in injured workers getting back to their jobs, reduced services for non-English-speaking people, and failure to help residents with the greatest economic needs become more self-sufficient:

  • The Disability Compensation program, which helps industrially-injured workers return to work, had its budget cut by $4.9 million;
  • The Office of Language Access, which ensures access to public services for people unable to speak English with proficiency, had its budget cut by $126,273, or 29 percent of its already modest funding; and
  • The Office of Community Services, which assists low income people, refugees, and immigrants in achieving economic self-sufficiency, had its budget cut by 9 percent. Funds for related contractual services were slashed by $700,000.

Recession Lessons

In the event of another recession, it will again be critical to maintain public services and the public workforce, but we must be prepared to prioritize some positions, such as teachers. The negotiations in 2011 that reduced salaries in exchange for providing additional flexible time-off cut costs and avoided many of the negative effects on education and public services that resulted from the furlough policy of the prior administration.

Targeted and timely stimulus helps. Hawaiʻi should prepare to deploy federal stimulus funds (or state funds if necessary) for state priorities, such as capital spending for housing and infrastructure, and operating costs for essential services. The state administration should be prepared to streamline temporary state hiring and procurement to get funds out to the private sector.

The importance of good public policy is starkly clear during strained economic circumstances. Regardless of economic cycles, good budget and tax decisions are the foundation for equal opportunity and well-being. We recommend that Hawai‘i’s leaders work now to ensure support for essential services, maintain public employment, use public funds wisely to achieve the greatest good, and invest in an economy that supports the state’s residents.

We would do well to use these tenets, not just out of concern for a future recession, but now and always to strengthen our communities and provide economic and social opportunity for all.

Download our complete report on the Great Recession, with recommendations for the state to better prepare for the next downturn.