County debt on the rise

BY NANCY COOK LAUER

WEST HAWAII TODAY

ncook-lauer@westhawaiitoday.com

HILO — For years, Hawaii County government has been spending far more than it’s taken in. The number of employees has increased dramatically, and payments on debt now consume the biggest chunk of operating expenses in at least a decade.

That’s the sobering story told by the county’s Consolidated Annual Financial Report, a document released last week as the county administration gears up to present its annual budget March 1.

The CAFR is a set of audited financial statements reported in a standard format and used to compare a governmental entity’s financial status year-to-year. Like an annual checkup, it’s a snapshot of the county’s fiscal health on June 30 of each year.

Despite the glum budget picture, the county’s overall fiscal health is good, according to the CAFR, with $1.06 billion in assets, compared to $451.8 million in liabilities.

Mayor Billy Kenoi made headlines last year when he told the state Legislature, “The unavoidable truth is we now have a county government that we cannot afford.” And he’s consistently told the public his administration has reduced the size and cost of government in the three years he’s been in office.

But the county’s report on total revenues minus total expenditures shows annual expenditures have increased by $43.5 million — 10.8 percent — between 2008 and 2011, while annual revenues have increased only $12.9 million. Almost half of the increase in expenditures, $21.5 million, was principal payment on debt last year, according to the CAFR.

Kenoi has tried to balance the budget. He’s instituted employee furloughs, put a $1 bus fare into place, reduced employee travel and cut some positions. The $367.3 million 2011-12 budget reflects $121 million in budget shortfalls, Kenoi said.

“We have dealt with those combined shortfalls of more than $121 million over three years by engaging in a three-year program to roll back government, and to make it more affordable,” Kenoi said in his budget message last year to the County Council.

Kenoi said Friday that “everything’s still on the table,” as far as budget cuts, property tax increases or other ways to balance the annual spending plan. Currently, he said, the administration is finalizing projected tax revenues while county departments run what-if scenarios of cuts of 10 or 20 percent.

“We certainly anticipate a fourth year of property value reductions. We’ve been prepared for and are planning for a continued downturn,” Kenoi said. “It’s the time of the year when difficult choices need to be made.”

But some expenses, such as fuel costs, health care costs and employee benefits negotiated in collective bargaining agreements, are outside the mayor’s control.

Kenoi has said he’s cut 222 county positions, including 120 “warm bodies,” since he took the reins in December 2008. But the 2,390 employees in June 2011 reported on the CAFR are only 22 fewer than June 2008.

Deputy Finance Director Deanna Sako said the apparent discrepancy is caused by the way the numbers are calculated. The CAFR uses full-time equivalencies, or FTEs, that compress the total number of employees, compared to how the Finance Department calculated the employee numbers used by the mayor, she said. In addition, Sako said, the number of employees increased between June and December 2008, before the decreases began under Kenoi’s leadership.

In 2002, paying the principal and interest on debt accounted for 10 percent of noncapital expenditures. That percentage rose June 30 to 15.9 percent, meaning almost $1 out of every $6 the county spends in its operating budget is going to pay off old bills.

The Government Finance Officers Association recommends debt service be 15 percent or less of general fund revenues. In 2010, before the County Council approved a $56 million bond issue, the three major rating agencies confirmed the county’s high bond rating, citing the county’s “prudently enacted” property tax hikes, low debt burden and strong cash reserves as factors in its favor. The agencies also praised a low county debt burden of $2,500 per capita.

Is the current debt burden sustainable? Finance Director Nancy Crawford has assured the County Council that the county is well below the limits set by state law mandating that general debt cannot exceed 15 percent of net property values.

In an economy where property values — by far the biggest revenue generator for the county — are stagnant or decreasing, the choices basically come down to spend less, borrow more or increase revenues by raising taxes and fees or seeking more state and federal grants.

The cost of government employees accounts for more than half of the operating budget, and that area is often targeted for cuts when times get tough. In an economy where there are fewer building permits, for example, it stands to reason there’d be less need for staff associated with those functions.

County Council Chairman Dominic Yagong, who’s challenging Kenoi for the mayorship, said he’s waiting to see Kenoi’s budget next month before deciding how to tackle possible shortfalls. The County Council last year tried to stave off Kenoi’s plan to postpone $29 million worth of expenses to future budgets, but the attempt failed after Kenoi vetoed the council budget and the council fell one vote short of the six needed to override the veto.

“We’re not hearing anything,” Yagong said Friday about the administration’s plans for the new budget. “It’s being played very close to the vest.”