State Pays a Price for Faulty Economic Forecasts

Paul Brewbaker/TZ Economics

As Hawaii's top executive, the governor signs bills into law and appoints judges.

But when it comes to financial matters, even the governor answers to a higher power.

Four times a year, the Council on Revenues, a little-known advisory board of mostly economists and academics, makes predictions about Hawaii's economy that spell out how much money the government can spend.

The council's statements have instantaneous impacts.

If the council predicts tax revenues are going up, the state can spend money. If the council anticipates a shortfall, the state reins in spending and looks at ways to raise revenues, such as tax hikes, and ways to save money, such as pay cuts and furloughs.

But a review of the group’s forecasts over the last five years shows that the council's predictions are rarely on target. In three of the last five years, the council made initial forecasts that overestimated how much the state's tax revenues would grow by nearly double. The discrepancies are worth noting because each percentage point translates into tens of millions of dollars.

“When you’re looking at revenue growth, one percentage point is about $46 million. So when we go from, say, a minus 3 percent projection to an actual of minus 5 (percent), that’s a big deal,” said Senate President Colleen Hanabusa.

In fiscal year 2008, actual year-over-year growth was 1.2 percent, but the council had predicted increases ranging from 3.9 percent to 6 percent. At most, its forecasts overestimated tax revenues by $240 million.

The next year, during fiscal 2009, tax revenue tumbled 9.5 percent. But the council initially predicted 2 percent growth over the previous year. It later adjusted its forecast downward. That year, the council’s quarterly forecasts for the year overestimated tax revenue by as much as $630 million.

Asked about the council’s accuracy during the economic downturn, Speaker of the House, Rep. Calvin Say, said he was “bothered” by the group’s optimism and said he tried to work with the panel to adjust its predictions to “be on the safe side.”

“I felt that the council was always on the optimistic side, which bothered me,” Say said. “I’m a realist and I like to know exactly how we’re doing in the housing market, in the tourism industry, the building industry. And I thought they were very generous in appropriating more funds knowing there was a downward spiral in the economy.”

The group's chairman, economist Paul Brewbaker, said: “It’s a constant work in progress how we approach the forecasting. We’re reasonably sure we get the numbers right, but stuff like Lehman Brothers shutting down, Aloha Airlines going out of business, H1N1 virus — we didn’t see those coming.”

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