State of the State: Hawaii

Hawaii’s beautiful beaches are a great vacation destination, but excessive taxes and other economic factors make the state far too expensive for many hardworking taxpayers. In fact, Hawaii imposes one of the highest personal income taxes in the nation. The Aloha State’s economic outlook ranks a meager 37^th in the Rich States, Poor States ALEC-Laffer State Economic Competitiveness Index. In his State of the State address, Governor David Ige discussed Hawaii’s pension system and his ideas for creating an innovative economy.

Governor David Ige is right to point out the government pension system represents one of the state’s biggest expenses. According to State Budget Solutions, Hawaii’s market unfunded liability is more than $30 billion, or $21,852 for every man, woman and child. Government defined-benefit plans, such as the retirement plans offered by the Hawaii Employee Retirement System (ERS) pose significant financial risks for workers, retirees and taxpayers. For example, the government defined-benefit model often depends on an unrealistically high assumed rate of return for state investments. While ERS lowered their assumed annual rate of return, plan administrators still assume that the plan will achieve a 7.5 percent rate of return, each year, for the next 23 years (from July 1, 2017 until June 30, 2040.) However, market fluctuation can cause yields to be much lower over the long term. As a result, officials may promise generous benefits to employees in the future, without truly knowing if the retirement system will have enough money to fulfill these promises over time. Furthermore, with such a high assumed rate of return, plan administrators are forced to look for riskier investments to achieve the high assumed rates of return.

To address Hawaii’s pension woes, the governor rightly proposed a change in pension funding in order to meet 100 percent of the annual required contribution. While this is a costly step, Ige should be applauded for making the right decision and fully funding promises made to the pension system. The governor estimates this would save the state more than $300 million in required contributions over the next 20 years. While elected officials need to keep pension promises they make, this proposal unfortunately ignores the root of Hawaii’s troubled pension system – the unsustainable and outdated defined-benefit pension plan model. As former Utah state Senator Dan Liljenquist points out in the ALEC Center for State Fiscal Reform study, Keeping the Promise: State Solutions for Government Pension Reform, modern defined-contribution 401(k) style plans offer choice, freedom and security for workers and retirees alike. Under a defined-contribution plan, employees own their retirement accounts, meaning they can take their 401(k) with them if they switch employers.

Ige also discussed creating an innovative economy in Hawaii. He proposed setting aside $30 million over the next six years from Hawaii’s corporate tax revenue towards innovation enterprises. The governor proposed supporting accelerator and venture fund activities in the state. As Governor Ige stated:

“We simply must create an economic environment that enables Hawaii’s entrepreneurs to turn ideas into products and services so that we can compete in today’s global economy.”

Governor Ige is right to focus on enhancing Hawaii’s ability to compete in the global economy. However, these new initiatives fail to address the root problem – Hawaii’s uncompetitive business climate.

The state’s high taxes, pension debt and uncompetitive business climate are huge financial obstacles for entrepreneurs. Instead of government picking winners and losers by giving out hard earned taxpayer dollars to specific industries or businesses, Hawaii should lower the tax rates for all businesses and look for ways to reduce regulatory barriers to job creation. True innovation comes from the hardworking people of Hawaii, not government micromanagement.

This is an entry in the ALEC Center for State Fiscal Reform series, “State of the States 2016,” which will perform analysis of tax and budget issues raised in every state of the state address delivered by America’s governors. Check back frequently over the coming weeks to see the results for your state.