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

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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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