How Hawaiʻi’s constitution impacts its spending plan

The State of Hawaiʻi’s constitution, like that of the United States of America, is a set of fundamental principles by which the state’s various branches, agencies and offices are governed. Our constitution defines the principles upon which the state is based, the procedures by which laws are made, and defines the branches of government and their responsibilities to the people. In addition, the constitution serves to limit state power by establishing lines which a state’s officers cannot cross, particularly when it comes to protecting the fundamental rights of the people.

A Balanced Budget

The Hawaiʻi Constitution states that no public money shall be expended except as appropriated by law. This means that, in order for the executive branch to spend any money on programs or projects, the legislative branch has to write and pass a bill authorizing that specific expense. A lot of this is taken care of in the budget bill, and much of the rest is taken care of in individual appropriations bills, like the bill passed in 2017 to authorize an extension of the tax to fund the construction of the Honolulu Rail project.

Hawaiʻi’s constitution also requires that the rate at which money is spent, or reducing the amount of money budgeted, must similarly be specified in a bill passed through the Legislature. The state constitution, mirroring the federal one, requires this balance as a way to prevent an executive branch head (the governor, in this case) from misspending public money for inappropriate or illegal purposes.

Finally, in order to maintain a “balanced” budget, the constitution states that, for any given fiscal year, the amount of money coming out of the general fund (the biggest pot of money the state has access to) cannot be greater than the amount of money deposited into the general fund, plus any unencumbered cash balances. There is one exception, however: In the event the governor declares a public health, safety or welfare emergency, the limit can be overridden. In other words, the constitution prohibits the state from spending more general fund money than it has available—a sensible policy for any money-manager.

Excess Revenues

The state constitution requires that “whenever the state general fund balance at the close of each of two successive fiscal years exceeds five percent of general fund revenues for each of the two fiscal years,” during the next regular session the Legislature can do one of three things: 1) it can provide a refund or tax credit to its tax-paying residents; 2) it can deposit those extra funds into the state’s emergency reserve; or 3) it can prepay debt service obligations, pension, or other post-employment benefit liabilities.

In other words, if the the state enjoys two years of notable surpluses, it can give some of that excess money back to the people, store it away for future emergencies or pay down some of its debt.

The Council on Revenues

The Hawaiʻi Constitution also mandates that the state create and maintain a Council on Revenues. The council is housed at the state’s Department of Taxation, and is made up of seven unpaid volunteer members. Three of these members are appointed by the governor and serve four-year terms, while the President of the Senate and the Speaker of the House of Representatives appoint two each for two-year terms. Members of the Council on Revenue are not subject to term limits, but, after changes in Senate, House, or gubernatorial leadership, there may also be changes in who sits on the council.

The council is required to provide up-to-date predictions of how much money the state will take in (through taxes and other sources) to the governor and the Legislature every June 1, September 1, January 10 and March 15 of each year. The revenue estimates cover the fiscal year in progress and the ensuing fiscal year, giving the executive and legislative branches a good estimate of how much money the government will be able to spend to further its mission and fulfill its obligations to the public, and still maintain a balanced budget. The council is required to give four predictions a year to account for changing economic conditions that can increase or reduce the amount of money the state takes in.

The council also provides a prediction of the total personal income taxpayers earn each year in order to establish the “expenditure ceiling,” or the maximum amount the state can spend, as mandated by the Hawaiʻi Constitution (see below). Predictions of this total personal income are reported to the director of finance, the governor, the chief justice and the Legislature every August 5 and November 5. Estimates prepared by the council are considered by the governor in preparing the state budget, in recommending appropriations and in controlling expenditures, and are considered by the Legislature in appropriating funds and enacting revenue measures.

Interestingly, South Carolina may be the only other state that has a group performing functions similar to Hawaiʻi’s Council on Revenues.

The Expenditure Ceiling

As noted above, the Hawaiʻi Constitution states that “the Legislature shall establish a general fund expenditure ceiling, which shall limit the rate of growth of general fund appropriations…to the estimated rate of growth of the State’s general economy as provided by law.” The rate of “state growth” is determined by averaging the annual state personal income growth during the three preceding calendar years. This average rate of state growth is used to adjust the previous fiscal year’s expenditure ceiling.

The Legislature can’t spend past the ceiling unless two-thirds of each house votes to do so and they explicitly state the agreed-upon dollar amount over the ceiling, the rate by which they are exceeding the ceiling, and the rationale for this action.

This just means that the Legislature cannot spend more general fund money than it expects to receive based on the estimated amount of personal income generated within the state—a marker of economic growth—which is then taxed to make up a portion of the state budget. Again, this keeps the budget balanced.

The same thing goes for the governor, as noted by the Department of Budget and Finance, which states on its website that, “The governor is required to submit to the Legislature a plan of proposed aggregate appropriations for the State which includes the executive budget, proposed grants-in-aid to private entities, any specific appropriation measures to be proposed by the executive branch and estimates of the aggregate proposed appropriations of the judicial and legislative branches of government. In any year in which this plan of proposed General Fund appropriations exceeds the estimated expenditure ceiling, the governor must declare the dollar amount and the rate by which the expenditure ceiling would be exceeded and the reasons for proposing appropriations in excess of the ceiling amount.”

Hawaiʻi’s constitution is a crucial guiding document for how government carries out its functions. And one of the most critical functions is the collection and expenditure of funds to create and maintain critical programs and key projects that, in theory, make life better for the people of Hawaiʻi. The constitution lays out fundamental ground rules, while the budget details how the state intends to use its money in accordance with those rules.