COMMITTEE ON WAYS AND MEANS Senator Rosalyn H. Baker, Chair Senator Shan S. Tsutsui, Vice Chair Testimony Index Date: Wednesday, January 9, 2008 Time: 9:00 AM Place: Conference Room 211 Department of Business, Economic Development, and Tourism Overview Page 5 Attachment 1 Page 17 Attachment 2 Page 18 Attachment 3 Page 19 Attachment 4 Page 20 Attachment 5 Page 21 Attachment 6 Page 22 Attachment 7 Page 25 Attachment 8 Page 26 Attachment 9 Page 28 Attachment 10 Page 29 Attachment 11 Page 30 Strategic Marketing & Support BED100 Page 31 Create Industries Divison BED105 Page 53 Strategic Industries BED120 Page 69 Foreign-Trade Zone BED107 Page 109 Economic Planning and Research BED130 Page 119 General Support For Economic Development BED142 Page 127 High Technology Development Corporation BED143 Page 137 Hawaii Strategic Development Corporation BED145 Page 147 Natural Energy Laboratory of Hawaii Authority BED146 Page 155 Tourism BED113 Page 164 Hawaii Community Development Authority BED150 Page 191 Aloha Tower Development Corporation BED151 Page 211 Hawaii Housing Finance & Development Corporation BED160 Page 219 Statewide Planning and Coordination BED144 Page 238 Statewide Land Use Management BED103 Page 257 Testimony of THEODORE E. L1U Director of the Department of Business, Economic Development & Tourism before the SENATE COMMITTEE ON WAYS AND MEANS on Wednesday, January 9, 2008 9:00 a.m. State Capitol Conference Room 211 in consideration of BUDGET REQUESTS FOR SUPPLEMENTAL BUDGET REQUEST FOR FISCAL YEAR 2008-2009 TABLE OF CONTENTS Overview and Attachments BED 100 Strategic Marketing & Support: ..; SM Strategic Marketing & Support Division BED 105 Creative Industries: J CI Creative Industries Division BED 120 Strategic Industries: / SI Strategic Industries Division BED 107 Foreign-Trade Zone: j BA Foreign-Trade Zone Division BED 130 Economic Planning and Research: FA Research & Economic Analysis Division BED 142 General Support for Economic Development: J AA Director's Office/Administrative Services Office TL Tourism Liaison Office BED 143 High Technology Development Corporation: J TE High Technology Development Corporation * BED 145 Hawaii Strategic Development Corporation: J VC Hawaii Strategic Development Corporation * J BED 146 Natural Energy Laboratory of Hawaii Authority: EL Natural Energy Laboratory of Hawaii Authority * BED 113 Tourism: j TO Hawaii Tourism Authority * XC Convention Center * BED 150 Hawaii Community Development Authority: j KA Hawaii Community Development Authority * KL Kalaeloa Community Development District * BED 151 Aloha Tower Development Corporation: j AT Aloha Tower Development Corporation * TABLE OF CONTENTS - Con. BED 160 Hawaii Housing Finance & Development Corporation HA HHFDC Administration * HD Housing Development * HF Housing Finance * BED 144 Statewide Planning and coordination! PL Office of Planning * PZ OP - Coastal Zone Management * BED 103 Statewide Land Use Management: DA Land Use Commission * * Assigned to the Department of Business, Economic Development, and Tourism for administrative purposes. Overview Statement Theodore E. Liu, Director Department ofBusiness, Economic Development & Tourism (DBEDT) on DBEDT Supplemental Budget Request for FY 2009 before Senate Committee on Ways & Means January 9, 2008 Chair Baker, Vice-Chair Tsutsui, and members ofthe Senate Committee on Ways and Means. Thank you for this opportunity ofproviding this overview statement on DBEDT's Supplemental Budget request for Fiscal Year 2009 (FY09). I am pleased and proud to have my Division Heads and Executive Directors with me today. They are a dedicated group ofpublic servants and as talented and professional a group as any I have worked with. I am honored to be associated with them. Among this group ofsenior managers there is a "new face" and one that is shifting from one important position to another. There is also a Division Head that I wish to especially acknowledge, as he is retiring after 20 years' service and leaves an invaluable contribution to the state, especially in the energy area. This overview statement first reviews the State's economy. Then it reviews the business and economic challenges that Hawaii faces in the context ofthat economy. Finally, this overview statement summarizes the new funding in DBEDT's FY09 Supplemental Budget to support programs that meet those economic challenges. The Hawaii Economy in 2007 and DBEDT Forecasts After several years ofexceptionally strong growth, Hawaii's economy is expected to show a more moderate growth pattern in the near-term. Solid job growth, stable construction activity, especially an increase in government infrastructure spending, and relative stability in tourism and federal funding inflows will contribute to our economy's growth in the near-term. For the first ten months of2007, visitor arrivals decreased 1.1 % from 2006. Declines in international arrivals in the first halfand some pullback in domestic arrivals in recent months contributed to the decrease. In current dollars, visitor expenditure increased by 0.6 percent. For the first ten months of2007, the total value ofprivate building authorizations totaled $3,004 million, down 1.3% from the same period of2006. For I the first three quarters of2007, the value ofgovernment contracts awarded totaled $753 million statewide, an 8.8% increase from the same period of2006. Coupled with the airports and harbors modernization plan, recently announced, this bodes well for a healthy construction sector over the next period. With the ongoing $2.3 billion-plus Army housing privatization program and the new housing construction and renovation programs for the Navy & Marine Corps, federal investment flow to Hawaii remain strong. This will also underpin growth in the State's construction industry over the next several years. Other measures ofgrowth include new jobs created and increases in personal income and State tax collections. For the first ten months of2007, Hawaii's economy added 2.0% or 12,500 more wage and salary jobs, following a strong 2.4% job growth in 2006. Hawaii continues to record one ofthe lowest unemployment rates in the nation, averaging 2.5% for the first ten months of2007. Public sector revenues for the first ten months of2007 increased by 4.0%, with the General Excise and Use Tax (GET) increasing by 6.6%, Net Individual Income Tax collections increasing 0.7%, and the Transient Accommodations Tax (TAT) increasing by 4.3%. In DBEDT's latest quarterly forecast, moderate growth in Hawaii's economy is expected for the rest of 2007 and into 2009. Personal income, total wage and salary jobs, and state gross domestic product (GDP) are all forecast to increase in the near­ term, but the growth rates will be lower than those seen in the previous three years. With a 2.0% growth in the first ten months and solid prospect for continuing job growth in the rest of the year, total wage and salary job growth is expected to be 1.9% in 2007. Job growth is expected to moderate to 1.5% in 2008 and to 1.3% in 2009. With a 6.7% increase in the first six months, Hawaii's nominal personal income is expected to increase 6.4 % percent in 2007 and 5.7% in 2008. Inflation adjusted real personal income is expected to grow by 1.8%, in both 2007 and 2008. Hawaii's real gross domestic product (GDP) growth is projected to be 2.9% in 2007 and 2.8% in 2008. Honolulu's consumer price index (CPI) increased 5.0% in the first halfof2007 on top of5.9% increase in all of2006. This increase was primarily due to increases in the Housing and Food & Beverages components, which increased by 7.7% and 5.9%, respectively. In view ofthe recent months' stabilization in housing prices, Honolulu CPI is forecast to show a somewhat moderate increase of4.5% for the year, followed by more modest increases of3.8% and 3.4% in 2008 and 2009, respectively. In our latest forecast, we expect visitor arrivals to decline 0.8% and visitor expenditures to increase 2.0% in 2007 from 2006. Visitor arrivals and visitor 2 expenditures are predicted to grow by 1.0% and 4.0%, respectively, in 2008, followed by slightly higher growth in later years. The future outlook for Hawaii's economy will depend to a large extent on the performance of the U.S. national economy and Hawaii's major foreign markets, particularly Japan. The December Blue Chip Economic Consensus Forecasts expect real GDP to grow 2.2% for the U.S. and 1.9% for Japan in 2007. In response to continued weaknesses in housing market and credit deterioration in the mainland U.S., the Blue Chip forecast ofthe U.S. growth for 2008 has been trimmed down significantly from 3.0% in January to 2.2% in the latest issue. In 2008, the Japanese economy is expected to grow 1.7%, also down from 2.2% growth in the January Consensus Forecasts. The strengthening of the Yen - U.S. dollar exchange rate should be favorable to our tourism sector. Although there is increased concern over a significant slow down in the U.S. economy for the current and next two quarters, most economic analysts have ruled out a recession. A series ofrecent Federal Reserve Bank interest rate cuts and infusion of additional liquidity into the credit market is expected avoid further deterioration in economic conditions on the national economy and its possible adverse impacts on Hawaii's economy. Against this backdrop, DBEDT's forecast for 2008 is continued positive economic growth for Hawaii, albeit at a slower rate ofgrowth as compared to the exceptionally strong growth rates ofthe past several years. DBEDT's forecasts can be viewed at its