Experience shows us that economic recessions are deepened and prolonged by cuts to the public sector. Rather, as one engine of the economy—the private sector—slows down, it becomes necessary to increase government spending to power the second engine and keep the economy aloft. Maintaining government worker salaries ensures that people can pay for the necessities—housing, food, transportation and supplies. That helps not only the workers but private sector businesses as well—Hawaiʻi’s farmers, grocers, food distributors, property owners, and others.
Yet, Governor Ige is proposing to cut state worker salaries by 20 percent in reaction to state revenue shortfalls due to coronavirus disruptions. In our engine metaphor, this is akin to taking our foot off the gas pedal and letting the second engine of the economy sputter as well. Such an action would further cripple Hawaiʻi’s already limping economic performance.
What we ought to do instead is look for every opportunity for state government to stimulate the economy. One important way to do that is to keep state employees working and spending money. The state is a major economic engine, in large part because the public sector has a workforce that accounts for 11 percent of all jobs in the state. That’s no small consideration when visitor industry and other private sector jobs are unavailable. A big reduction in state worker pay would hurt a lot of people and inflict more damage to the economy.
A 20 percent pay cut within the public sector would slash earnings—and therefore spending—by more than $700 million, further undermining our struggling economy and consumer confidence. But the effects would be worse than just taking $700 million out of the economy. The International Monetary Fund found that every dollar of reduced government spending resulted in as much as $1.50 in lost economic activity. That means that a wage cut that reduced state spending by $700 million could produce up to a $1.05 billion hole in the economy.
As happened during the Great Recession of 2008–09, draconian policies such as “Furlough Fridays” and other budget cuts will once again result in an exodus of experienced workers from the public sector workforce. Our public workers are among the state’s most valuable assets. If we lose the most skilled members of this workforce, we will all be worse off for it for a long time to come.
Because pay cuts would be so damaging to workers and the economy, we recommend that the governor exhaust all other options before considering furloughs and large reductions in pay for state employees. One real possibility is that further federal assistance will be provided to states, all of which are faced with the same concerns that we have: the need to balance the budget in the face of unprecedented revenue declines. Already we know that the state will be receiving $1 billion in federal assistance for general and specific COVID-19 relief. Much of that will be spent on benefits to residents. However, a large part—$863 million—may be available to pay state workers who are addressing new coronavirus responsibilities (guidance for how it should be spent has yet to be released).
The state, which started Fiscal Year 2020 (July of 2019) with a $752 million surplus, also has a $378 million budget reserve, $187 million in the Hurricane Relief Fund, and other places from which to draw money, including the pension fund.
Ordinarily, it wouldn’t be prudent to use these funds for purposes other than what they were created for. Neither would it be prudent to take on additional debt. However, these are extraordinary times. The state constitution authorizes general fund expenditures in excess of revenues “when the governor publicly declares the public health, safety or welfare is threatened,” and may issue bonds “to meet emergencies caused by disaster or act of God.” This provision exists for precisely this kind of an emergency and the state should make use of it.
In fact, borrowing money may be the best option for the state right now. The Federal Reserve Bank is supporting lending to states and large municipalities of up to $500 billion. The pricing of such loans would be very favorable since the state announced last December that it had achieved its best credit rating ever.
As a back-up strategy, the state should take advantage of grant funding and technical assistance from the federal government to establish a “Short-Time Compensation” (STC), or work-sharing program. This would provide more income to workers in both the public and private sectors who are furloughed or have their hours cut.
STC is not the same as Hawaiʻi’s partial unemployment program. Under STC, compensation for lost wages is typically higher, helping families cover their household expenses. For the average state worker STC would offer significant advantages in the event of a 20 percent furlough, as shown in this example below (note that the example does not include the temporary $600 federal supplement to unemployment compensation available through July):
The average state employee makes $52,000 per year, or $1,000 per week. A 20 percent reduction in hours would result in earnings of $800 per week.
- With STC, the worker would get 20 percent of the unemployment benefit available for earnings at the $1,000 per week pay level. That would be $124 per week in unemployment compensation. Total wages plus unemployment benefits would be $924 ($800 + $124).
- With the state’s current partial unemployment system, the worker would get no addition benefits because their $800 earnings exceed their maximum weekly benefit amount. Total earnings would be $800 ($800 + $0).
The state would have to make an investment in creating an STC program, but this is the best time to do so and it would benefit workers who lose hours now and in the future. The federal CARES Act provides grants and technical assistance to states taking this step. Moreover, state workers may be available to be deployed to plan and implement such a program now if other work responsibilities are reduced.
It’s quite clear that a significant cut in state worker salaries would hurt Hawaiʻi’s economic recovery and damage public services for years to come. We must, instead, look to other, better options that are available to ensure that the state does its part to stimulate the economy. Now more than ever we need a government that can operate at full capacity to provide the public services that are so desperately needed.