Hawaii's Government: Too Big? Too Small?

This article tries to clear up some of the red herrings about government size that often divert us from more important questions. In the long run, things such as the size of government payrolls probably matter a lot less than whether regulations are really burdensome or whether government programs get intended results.

Photo: Cory Lum

However, for now, let's take a look at these issues:

Q: Do we have way too many government workers?
A: No, not particularly.

Q: Do our state and county governments spend like drunken sailors?
A: Well, a little. More like a sailor after just a couple of beers.

Q: Are we, in fact, "tax hell?"
A: Depends on what you mean by "taxes." Our governments really don't collect inordinate amounts of revenue. But to get that money, they do tend to rely on certain taxes more than other methods.

Things to Get Straight On
Some of the reasons Hawaii often shows up at the bottom of national rankings on business climate help to explain the previous answers.

National rankings usually take a bunch of selected statistics, throw them in a blender and come out with a smoothie that grinds up and obliterates key distinctions we ought to remember. Sometimes they get at legitimate business concerns, such as the employee health payment burden. However, often the numbers and techniques that are used are inappropriate for Hawaii:

(1) If the data are for state governments only, ignore them. Our state government takes on functions (particularly public education) that other states leave to cities or counties. So it makes sense to compare only combined state and local government data.

(2) Remember all the tourists we have here. The usual way to compare states is to divide some measure - government workers, revenues, whatever - by the number of residents (only). Results overstate things like Hawaii per-resident taxes, because they ignore all the tourists pumping money into government coffers. On any given day, about 1 in 8 people in Hawaii are visitors. They require some government services and they generate excise tax and other revenues.

Full-Time Equivalent State/Local Government Workers as Percent of Resident Population (Range of individual state values in ‘03 was 4.3 percent in Nevada to 8.8 percent in Wyoming)

As a percentage of resident population, the state and local government workforce remained fairly steady in Hawaii from 1993 to 2003. As of 2003, the Hawaii figure was about 4 percent higher than that of the average state, but this small difference could easily be explained by the need for some government services for our visitor population, which constitutes about 12 percent of the population on any given day. Source: U.S. Census

The per-resident approach is easy to understand, and we'll use it here for that reason. But we'll also look at dollars flowing to or from government as percentages of (a) personal income and (b) gross state product. Both get at whether the size of government is affordable, given the current size of the economy.

(3) The more detailed any measure is, the less you should use it to compare states. In relation to population or income, most states are pretty similar in the amount of overall revenue they collect for combined county and state governments. However, when you specify taxes, there are more differences among states. Particular types of taxes make all the difference: If you want to make Hawaii look bad, choose sales/excise taxes. If you want us to look good, choose property taxes or corporate income taxes.

Government Workers and Payroll
The charts show 1993-2003 figures for Hawaii vs. the "average state" (that is, total numbers for all states divided by 50). The scale for each chart is based on the range of lowest to highest states for 2003.

Average Monthly Pay Per FTE Worker (Range of individual state values in ‘03 was $2,427 in Mississippi to $4,429 in California)

Unadjusted for inflation and cost of living (heavy lines at bottom), average monthly pay for Hawaii state and local government workers has been rising much more slowly than the growth for the average state. However, adjusted for inflation and cost of living (broken lines at the top), the figures have been much closer, with Hawaii a bit lower in the early ’90s and a bit higher in 2003. Source: U.S. Census

The major conclusion from all the charts is that Hawaii is pretty close to the 50-state average and has been for the past 10 years - especially when we adjust for inflation and cost of living. Even without those adjustments, only Ohio was consistently closer to the average state than Hawaii for the five measures covered by these four charts. Alaska generally had the biggest and most expensive state/local government.

The number of government workers per resident has been consistently a little higher for Hawaii than for the average state, but that gets back to the point about tourists not being included in that sort of comparison.

What proportion of all government budget spending actually goes to pay public-worker salaries? That question can be answered by another Census dataset, for which the most recent data comes from the fiscal year 2001-2002.

Payroll Per Resident (Range of individual state values in ‘03 was $145 in Arkansas to $306 in Alaska)

Unadjusted for inflation and cost of living (heavy lines at bottom), state and local government payroll costs per resident have been rising more slowly in Hawaii than the rest of the country since 1995. Adjusted for inflation and cost of living (broken lines at top,) the figures have been much closer over the past 10 years. Source: U.S. Census

In that year, Hawaii governments spent just 26 percent of all direct expenditures on worker salaries, the lowest percentage of all 50 states. The average state spent 30 percent of its budget on worker salaries. Nebraska, the highest that year, paid 36 percent.

Government Expenditures
There are two important overall measures of government expenditures. "Total Expenditures" means just that - all money spent. But some states spend on things that other states don't (e.g., publicly owned utilities, liquor stores, etc.). So it can be argued that what's called "Direct General Expenditures" is better for comparing expenditures on approximately the same bundle of government outlays.

The table shows we were a little on the high side on both measures. Every state (and local) government spends money in different ways. For any given category, Hawaii may appear low or high compared to other states.

For example, elementary and secondary education usually accounts for the largest portion of government expenditures - 23 percent for the average state, though just 17 percent for Hawaii in fiscal year 2001-2002. Perhaps because of our private school system, we ranked 41st in the nation based on the per-resident comparison and 50th based on the percentage of government money going to education.

Payroll as Percentages of State Personal Income & GSP (Range of individual state values in ‘03 was 5.8 percent in New Hampshire to 11.2 percent in Alaska; 4.5 percent of GSP in Delaware to 7.9 percent of GSP in Alaska in ‘01.)

Monthly payrolls as percentages of total personal income or Gross State Product (divided by 12, to provide a monthly equivalent) have both remained fairly constant since 1993. Hawaii comes off lower on GSP, because this has not been rising as fast as personal income here in recent years. Source: U.S. Census

On a per-resident basis, we also ranked dead last in "Libraries and Other Education." ("Other Education" means things like adult education and vocational rehabilitation. We were fairly average for "Higher Education.")

There weren't too many other categories in which we ranked very low. But there were a lot of categories in which we were relative big spenders.

We used four different ways to compare states on expenditures by category: (1) per resident; (2) percent of personal income; (3) percent of gross state product; and (4) percent of all direct general expenditures. By any of these four measures, Hawaii governments were among the top five states for:

o Health, Social Insurance, Veterans' Programs
o Sewerage and Solid Waste Management
o Housing and Community Development
o Judicial and Legal Expenditures
o Airports, Parking, Ports, Transit Subsidies
o Other & Unallocable
o Perhaps most worrisome, Interest on General Debt

Taxes and Other Revenues
"Total revenue" for combined state/local governments - including federal funds and money earned by utilities, insurance trusts, etc. - amounted to $6,259 per resident for the average state in 2001-2002. The Hawaii figure was $6,044, 25th in the nation.

With this smack-in-the-middle ranking, Hawaii seemed a typical state in fiscal year 2001-2002. However, this was partly due to the economic catastrophe that year following the Sept. 11 attacks. Three years earlier, we had ranked 13th-highest in terms of total revenue per resident.

The economic effects of Sept. 11 also show up in the fact that Hawaii governments took in less revenue ($6,044 per resident) than they spent ($7,626 per resident) in fiscal year 2001-02. Actually, almost every state was in the red that year. But Hawaii governments led the nation in the gap between revenue and expenditures.

As money machines, states are best compared less on total revenue than on "General Revenue from Own Sources," which excludes federal assistance, utility income, etc. "General Revenue" can come from:

o State and local taxes;
o Current charges (e.g., tuition, parking fees, sewer charges, etc.)
o Miscellaneous (e.g., interest earning, sale of property, etc.).

Hawaii leans toward taxes as a way to get general revenue. Our governments got 72 percent of their combined general revenues from taxes in fiscal year 2001-2002, whereas the average state's government got just 66 percent from taxes. We were 10th-highest in the country in terms of percentage of general revenues raised from taxes.

Finally, while our local governments do seem to like taxes, the table shows they like certain taxes a whole lot more than others. With the exception of the individual income tax, the clear preference is for taxes that can be shared with visitors - especially those who drink, smoke and shop a lot.

Does Size Matter?
Smaller isn't always better. A leaner government can be a meaner government to its vendors, if it has so many unfilled positions that invoices get lost, as sometimes happens in city agencies.

With overburdened infrastructure on all islands mewling for money like a kitten for milk, it's a safe bet Hawaii government will grow again. The question is: Can the business community agree on what constitutes measures of effectiveness, not just size?

Hawaii business to date has developed no clear consensus about what good government performance would really entail. Some sectors want an activist government, courageously promoting growth; some want it serenely letting the market work its will; some hope it has the wisdom to know when to do which.

Another big problem is not lack of performance measures, but too many. The Hawaii State Data Book is filled with numbers about GSP, jobs, income, etc. These can be selectively cherry-picked and mashed into the sort of business-climate index warned about at the beginning of this article.

The state's new Hawaii Tourism Strategic Plan offers one possible template. This plan acknowledges visitor-industry stakeholders truly have dozens of desired results, listing 53 different measures of success for future efforts.

At the same time, it concentrates on four high-level measures - resident attitudes, tourism tax receipts, visitor spending and visitor satisfaction. That sort of two-track approach might help the broader business community get a better fix on both specific and overall government outcomes.

Hugh Hefner used to tell his more insecure readers that size mattered less than performance. That's at least as true about government. Once we can agree upon appropriate measures, then at least the business community here can begin speaking the same language related to government size and performance.

John M. Knox, Ph.D., conducted the sociocultural and public input component of the recent State Sustainable Tourism Study, which preceded the Hawaii Tourism Strategic Plan.