by Georgina Kawamura, Barry Fukunaga, and Russ Saito
As reported by the media statewide, the state’s recent $1.3 billion in new borrowing through a bond issuance was noteworthy for its size, and Governor Abercrombie called it the singular success of his administration to date.
However, taking a victory lap due to the success of this new borrowing is misleading if the underlying factors that made it possible are not considered.
First, the success of the bond issuance was due in large part to tax increases that occurred in Hawaii. Rating agencies (Standard & Poor’s, Moody’s, Fitch) and bond investors welcome a borrower that has strengthened its revenues. Increasing revenue for a business usually means earnings growth resulting from efficiency, price competitiveness or a better product. But for government, without the efficiency of service delivery or judicious spending, it usually means more taxes on the public.
To achieve the revenue improvement to support the recent bond offering, the Abercrombie Administration and the Legislature raised taxes in the 2011 Session to the tune of $600 million. This no doubt pleased the rating agencies, but it is important to note that the additional $600 million in new taxes will come out of the pockets of Hawaii’s residents and visitors.
In contrast, the Lingle Administration issued bonds while achieving higher credit ratings and it did so without raising taxes.
The second reason the victory lap is misleading is the Abercrombie Administration’s plan to repay the state's Hurricane Relief and the Rainy Day funds from monies borrowed by this bond sale. Maybe the administration wants our residents to forget that the raid on these reserve funds broke a promise to Hawaii’s taxpayers that these taxpayer monies were set aside for use in emergencies such as hurricanes.
Beyond that broken promise, public finance experts agree that general obligation bond issuance should be invested in capital construction projects. In other words, money borrowed should be invested in buildings, roads and other capital improvements that increase economic activity, thereby enabling governments to collect more taxes to repay the money borrowed. It is unwise to use borrowed money to pay for salaries and other operating costs, because the state will pay interest on those borrowed funds.
In this case, the Abercrombie Administration will put the borrowed money in an account only to pay interest on it – interest that is ultimately paid for by taxpayers. It’s like a household setting up a savings account by charging a credit card. When it comes due, there will be more debt to repay. That is nothing to celebrate.
Again, in contrast, the Lingle Administration balanced its budgets without raiding these reserve funds.
Finally, the celebration is misleading because the success of the bond issuance was also based in large part on the 2010 Comprehensive Annual Financial Report (CAFR) for the fiscal year July 1, 2009 to June 30, 2010. This CAFR is a report card on financial management during the Lingle Administration.
Gov. Abercrombie, who has criticized the financial management of the Lingle Administration, cannot claim credit for the CAFR results while simultaneously accusing the previous administration of not prudently governing in the last two years of its term. It's like running a victory lap on the back of another runner.
Georgina Kawamura is the former Budget and Finance Director, Russ Saito is the former comptroller and Barry Fukunaga is the former chief of staff for Gov. Linda Lingle (2002 to 2010)
Related: Lucky Hawaii: Bond Sale Benefits as Investors Flee Europe, Abercrombie Refusing to Accept Responsibility for his own Wreckage, Fiscal and Otherwise