Hawaiʻi’s budget is a powerful foundation for daily life and an important demonstration of our state’s priorities. It sets out where we get our money and what and who we spend it on. It dictates the investments we make in our schools, environment, health, and economy. It is the blueprint for Hawaiʻi’s current and future prosperity and is an economic engine in itself, making up 20 percent of the state’s gross domestic product.

This summary shares highlights of the budget. The Hawaiʻi Budget & Policy Center’s 2018 “Budget Primer” offers a more comprehensive look at how our state government gets and spends money for the public good.

Fiscal Year and Budget Process

The state uses a fiscal year that starts on July 1 and ends on the following June 30. Its budgets are created on a two-year fiscal biennium basis. The current biennium started on July 1, 2017 and will end on June 30, 2019. State biennial budgets are updated for the second year, and called “supplemental” budgets. The 2018 legislature approved supplemental executive, legislative, and judiciary budgets for FY19.

Each branch of government submits a budget to the legislature.  In the process of approving each branch’s budget, the legislature may amend the amount of money and staffing requested by each department. The branches of government are the executive (the governor’s office and all departments of the state plus the University of Hawaiʻi system), the legislative, the judicial, and the Office of Hawaiian Affairs.

The amount that the legislature can appropriate is shaped by the Council on Revenues, which forecasts changes in general fund revenues, and by a constitutionally-mandated expenditure ceiling. The ceiling is based on overall state economic growth and caps the rate of growth of state general fund spending.

Funds and Taxes

The state has many categories of funds. The source for every state expenditure is linked to a specific fund. The “general fund” category is the biggest and receives most of the state’s tax revenue. The other major categories of funds are:

• Special, which are created by the legislature and made up of revenues that are related to the costs they support; for instance, aviation fuel taxes support the airport.

• Federal, which include contributions to shared federal-state programs like Medicaid as well as competitive grants.

• Capital, which are supported largely by bonds.

As shown in Figure 1, Hawaiʻi’s largest source of public revenue comes from the general excise/use tax (GET), followed by the income tax, and the transit accommodations tax (TAT). In total, taxes make up less than half of annual state expenditures.

According to the Institute on Taxation & Economic Policy, Hawaiʻi’s overall taxes are “regressive” meaning lower income people pay a higher proportion of their incomes in taxes than do higher income people. Poorer people must spend a higher proportion of their money on goods, thus paying proportionally more in general excise taxes. In Hawaiʻi, the top 1 percent of families spend 1 percent of their income on excise and sales taxes, while the lowest 20 percent of residents spend 11 percent. Comparatively, the lowest income 20 percent spend 7 percent of income on excise and sales tax as a national average. Hawaiʻi’s income tax is progressive in that it collects a larger percentage from higher income people. The highest income families pay 11 percent of their income toward state income taxes, the second highest rate in the nation.

Executive Budget

The state executive budget accounts for 99 percent of state spending. Departments vary considerably in size and budget.

• The Department of Human Services has the largest budget at $3.6 billion. It is responsible for the Medicaid program and other social support services.

• The Department of Education employs the most people with nearly 23,000 authorized positions.

• The Department of Human Resources Development is the smallest with a budget of only $25.5 million and 98 staff.

Figure 2 shows the distribution of operating funds among executive budgets. Figure 3 shows staffing by department.

Budget Trends

A quick comparison of the budget for 2009, which was a recession year, and 2019, when Hawaiʻi’s economy is bustling, is as follows:

• 31% overall increase in spending

• 84% ($1.6 billion) increase in the budget of the Department of Human Services. Most of the increased funding ($1.5 billion) went to Med-QUEST, reflecting both enrollment expansion under the Affordable Care Act and the price of health care inflation.

• Only the governor’s and lieutenant governor’s office budgets have decreased, together losing $1 million over the decade.

Federal funds are a shrinking part of the state budget.

• If Medicaid, with its hefty federal match, is excluded, the executive budget grew by 22% between 2009 and 2019 but federal funds supporting it increased by only 16%.

• Only 17.5% of all state spending came from federal funds in 2017—the smallest percentage of federal funding among state budgets in the country. On a per capita basis, Hawaiʻi does better (28th among states) with $1,801 per resident.

• The shrinking federal funding trend is consistent with legislative directives to reduce state dependence on federal dollars, although both Gov. Ige and Gov. Abercrombie supported initiatives to increase federal grants to the state.

Obligated costs are increasingly dominating general fund expenditures, as shown in Figure 4.

• Obligated funds—Medicaid, debt service, pension/social security, health benefits, and other post-employment benefits (OPEB)—will consume 47% of general funds in FY19, up from 43% in FY10. The fastest growing cost is OPEB, followed by Medicaid expenditures.

Unfunded liabilities for public worker pensions and OPEB amount of $25 billion.