Tapping the hurricane fund for budget relief | The Honolulu Advertiser

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Tapping the hurricane fund for budget relief | The Honolulu Advertiser | Hawaii's Newspaper

Posted on: Sunday, August 9, 2009

Tapping the hurricane fund for budget relief

By Romy M. Cachola

Hawaii news photo - The Honolulu Advertiser

Hurricane Iniki's impact underscored the need for catastrophic insurance. Dipping into the hurricane fund makes sense now, but there must be a commitment to replenish it.

ADVERTISER LIBRARY PHOTO | September 1992

Faced with a $786 million budget deficit, state and union leaders are looking at ways to minimize the effects of furloughs and public employee layoffs in order to balance the budget, including tapping into the $185 million Hawai'i Hurricane Relief Fund.

To better understand the ramifications of raiding the fund, we must review the fund's history. In 1994, a year after the Legislature established the fund, a state briefing revealed several alarming findings, including the following:

The state collected about $80 million annually from hurricane insurance premiums, mortgage recording fees and annual assessments of insurance companies.

Nearly all of the $80 million was used to buy reinsurance coverage worth $500 million in the Bahamas.

The $1.7 billion pool to pay for losses was just enough to cover damages by an Iniki-level hurricane. If a hurricane hits metropolitan O'ahu, homeowners will likely receive about 50 cents on the dollar for damages, rather than full payment.

As a state representative, I introduced a bill in 1995, which became law as Act 32, to address this. In lieu of buying reinsurance, Act 32 set up a savings mechanism for the hurricane fund that proposed:

Floating $500 million in state revenue bonds. At that time, the rule of thumb for debt service was 10 percent of debt principal, or in this case, $50 million. The $80 million in annual collections less the $50 million in debt service equals a savings of $30 million into the reserve fund.

Allowing for $500 million in commitment from the federal government that would take the place of reinsurance, allowing the $80 million collected annually to go into the reserve fund.

Secured commitments from banks and other financial institutions. When Iniki struck, real estate transactions, mortgage loans and other commercial transactions came to a halt. Without catastrophic insurance, financial institutions were strapped, so they agreed to extend to the fund a line of credit of up to $500 million. However, about half of the credit line was used and the fund bought reinsurance coverage with the remainder, spending about $40 million in premiums annually.

Any combination of the above.

By the time the fund closed, there was a savings of about $230 million, some of which was used to balance the state budget — hence its current $185 million total. Can you imagine if the federal government gave us a loan commitment of $500 million, which would have allowed $80 million to be added annually into the reserve fund? It was estimated that savings and investment income in the fund could have reached up to $700 million by the time the fund had closed.

The pressing question facing state and union leaders is whether to use the fund to balance the budget. The answer is: yes — especially if it will reduce the impacts of furloughs and layoffs. However, there must be a well-structured written agreement on the part of all stakeholders to replenish the fund as the economy improves or when the need arises.

I realize that the $185 million in the hurricane fund is not enough to cover damages in the event of a catastrophic hurricane but I agree that it's better to have the money available rather than start from scratch.

Since history is bound to repeat itself, it's a matter of time before another hurricane hits. In the meantime, it would be wise to continue working with our congressional delegation to obtain a loan guarantee, which when combined with the $185 million savings, puts the fund in a better financial situation when the next hurricane hits.

The beauty of the Hawai'i Hurricane Relief Fund is that when it kicks in, the following occurs:

All monies collected are added to the reserve fund, increasing the $1.7 billion pool.

The money stays in Hawai'i to boost the economy, rather than going to a foreign country to buy reinsurance.

The bottom line is that the state can take charge of its own destiny by keeping the Hawai'i Hurricane Relief Fund in place - ensuring that it is no longer at the mercy of private insurers who may decide to flee when the next hurricane hits Hawai'i.

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