Financial Red Flags
by Tom Yamachika, President, Tax Foundation Hawaii
Recently, the nonprofit Reason Foundation published a study of the fifty states’ performance against financial metrics designed to assess a state’s financial viability. The foundation selected eight metrics and gave a red flag to indicate failing performance on that metric. The eight metrics were four long-term indicators and four short-term:
- Debt Ratio (total liabilities ÷ total assets): Entities should not hold more debt than assets.
- Unrestricted Net Position: Negative values indicate insufficient discretionary resources.
- Revenues Less Expenditures: Spending in excess of revenues leads to a deterioration of the balance sheet.
- Liabilities per Capita: Liabilities exceeding $10,000 per resident (or $20,000 per student for school districts) become increasingly difficult for taxpayers to service.
- Quick Ratio: Entities should hold at least enough liquid assets to cover bills scheduled to fall due over the next year.
- Quality of Receivables: If receivables are valued at greater than 30% of annual revenues, the entity may be experiencing difficulty collecting its assessments.
- Cash as Percentage of Assets: Holding less than 10% of assets as cash leaves governments vulnerable to cash crunches.
- Solvency Ratio (liabilities ÷ annual revenues): If liabilities are greater than double annual revenues, the entity’s ability to issue new debt may be limited, and taxpayers may have difficulty servicing debt.
Twenty-three States studied (using 2023 financial data, the latest available for data comparison) took home no red flags at all. The worst performer, New Jersey, was awarded six red flags out of the eight possible. Connecticut came in second, with four. California, Hawaii, Illinois, Massachusetts, North Dakota, and Pennsylvania were each given three. Vermont, Washington, New York, and Delaware got two.
The foundation had this to say about Hawaii: “Hawaii faces long-term challenges and carries $27.5 billion in total liabilities, or $18,909 per capita. Although assets exceed liabilities overall, restrictions on the use of cash leave Hawaii’s unrestricted net position negative at -$7.4 billion. Its cash assets amount to only 7.5% of total assets, although it holds sufficient cash to service current liabilities. Hawaii also boasted a healthy annual operating surplus of $2,566 per capita in FY23.”
The part about a huge amount of liabilities per capita should surprise no one. Lots of ink has been spilled over the years about Hawaii’s defined benefit retirement plan, and the EUTF that had promised health care for life to qualifying State retirees. No one today offers that kind of health coverage, and there are very few employers who maintain defined benefit plans. They cost a lot of money even in good times, and cost even more in times of economic hardship.
Hawaii does have assets, but much of the cash is hidden in a honeycomb of special, revolving, and other non-general funds. If pressing, resource-intensive needs arise (think hurricanes, fires, or the Trump Administration rescinding federal money that our government was relying on), it is difficult or impossible to meet those needs by moving the money we have.
And, speaking of assets, according to the State’s financial report (page 30), most of ours are in land, buildings, and infrastructure, not cash. It’s difficult to respond to pressing needs with existing land and buildings. These would need to be sold to generate cash, which is a slow and inefficient process especially when we have the cash available but sitting in a well-hidden special fund account somewhere.
So, lawmakers? What can we do about this? Are you ready, willing, and able to tackle this problem, or pieces of it, for the benefit of us all?
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BACKGROUND: Red Flags: Hawaii among most financially distressed states