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Message from Romy
Dear Friends,
Together we can continue to improve on the
quality of life here in Honolulu. I wish to extend my sincerest
appreciation for the privilege of serving all of you. I remain fully
committed to doing an effective job on your behalf.
I continue to encourage all members the
community to communicate any and all concerns to our office. My
office number is 768-5007, and my fax number is 768-5011. I am also
available via e-mail at
rcachola@honolulu.gov.
My warmest aloha,
Romy ***
Hurricane Fund—Providing Stability in Uncertain Times
by Romy M. Cachola, City Councilmember,
Council District 7
August 7, 2009
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 and to balance the budget,
including tapping into the $185 million Hawaii Hurricane Relief Fund
(HHRF).
Historical Background
To better understand the ramifications of
raiding the HHRF, we must first review the fund’s history. In 1994,
a year after the Legislature established the HHRF, a State briefing
revealed several alarming findings about the fund, which included
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 Oahu, homeowners will likely receive about 50
cents on the dollar for damages, rather than be paid in full.
In 1995 as a State Representative, to address
this concern I introduced a bill which became law as Act 32. In lieu
of buying reinsurance, Act 32 set up a savings mechanism for the
hurricane fund that proposed:
1)
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 an annual savings of $30
million into the reserve fund.
2)
Securing $500 million loan commitment from the federal government
that would take the place of reinsurance, thus allowing the $80
million collected annually to go into the reserve fund.
3)
Securing 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
HHRF a line of credit of up to $500 million. However, about half of
the credit line was used and HHRF bought reinsurance coverage with
the remainder, spending about $40 million in premiums annually.
4)
Any combination of the above.
By the time the HHRF
closed, there was a savings of about $230 million, some of which was
used to balance the State budget—hence its current total of $185
million. 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 HHRF could have reached up to
$700 million by the time the fund had closed.
Balancing the
Budget
The pressing
question facing state and union leaders is whether to use the
hurricane 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 HHRF 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 HHRF in a better financial situation when the next hurricane
hits and when the private sector stops insuring.
The beauty of
the HHRF 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 Hawaii to boost the economy, rather than to a
foreign country to buy reinsurance.
The bottom
line is that the state can take charge of its own destiny by keeping
the Hawaii 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 Hawaii.
* * *
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