Mayor Mufi Hannemann presented an operating budget yesterday that increases spending by 1.2 percent to $1.83 billion without major tax increases.

Hannemann's proposal, which must be approved by the City Council, calls for increasing the property tax on nonoccupant homeowners, furloughing about half of the city's roughly 10,000 employees for up to 24 days and delaying about $43 million in future retiree health fund payments to the state.

The average nonoccupant owner of a single-family property valued at $600,000 this year would pay $2,058, or about $5.90 more next year than this year, the mayor said. The average nonoccupant of a condominium or other multi-family dwelling worth $300,000 would pay $1,029, or $2.95 more next year.

Even with the small increase, nonoccupant owners would be paying less per $1,000 valuation under Hannemann's new budget than they did when he took office, the mayor said. "What a deal," he said.

The increase in the property tax would net the city an additional $18 million to help balance the budget.

Last year, the council voted 5-4 to allow the administration to establish a new owner-occupant class, also known as the homeowner class, to shield those who live in their homes from higher taxes.

Under Hannemann's plan, the property tax rate for owner occupants would not go up, so they could see their property tax fall based on lower valuations.

With property valuations dropping and the rate staying at $3.42 per $1,000 valuation, the average owner occupant with a $600,000 single-family home would pay $1,618 next year, an estimated $160 less than this year. The average owner occupant with a $300,000 condominium would pay $672, or $80 less in property taxes.

Several City Council members, however, said yesterday that they're concerned about the plan to increase property taxes only on the one class of property owners and not others.

No increases are proposed for other city fees or taxes.

Hannemann said that about 5,200 of the city's estimated 10,000 employees will be furloughed between 21 and 24 days during the 2011 fiscal year that begins July 1.

Only Hawai'i Government Employees Association and United Public Workers employees will be furloughed, and not police, fire, emergency or other "first responders." Other employees will take salary cuts. Total savings from the furloughs and salary cuts is expected to be $26 million.

The furloughs will result in some cuts in services, although those have yet to be determined, the mayor said.

Hannemann said the budget plan is based on the premise that the Legislature will not take away $41 million in hotel room taxes, as it and Gov. Linda Lingle have proposed to help balance the state budget.

The city budget now goes to the council, which will spend the next two to three months deliberating before passing a budget in June.

'HOLDING THE LINE'

Hannemann said the 1.2 per-cent increase in the budget is largely driven by predetermined costs such as previously arbitrated pay raises for police and firefighters, as well as negotiated pay raises for TheBus drivers.

If not for those raises, $16 million in added employee fringe benefit costs and $14 million for the 2011 Asia Pacific Economic Cooperation summit, the operating budget would have been down 1.8 percent from this year, the mayor said.

"We're able to demonstrate, I believe, that we are fiscally accountable, that we are really holding the line on spending despite some very challenging extenuating circumstances beyond our control," Hannemann said.

As with last year's budget proceedings, the council is expected to focus largely on the property rate increases.

Hannemann's proposal not only leaves owner-occupant property rates the same, but also the rates of all other tax classes — commercial, resort/hotel, industrial and agricultural.

"Thank goodness for the nonhomeowner tax classification," the mayor said.

"Given these difficult times, it really is important that government not add to the burden of our residents who may be threatened with financial difficulties: furloughs, layoffs, wage reductions. So we really want to protect that homeowner who has a single property, on fixed income, and is experiencing some very difficult times."

He added: "We believe in the nonhomeowner classification you have individuals who have the ability to bear a higher tax rate, which is why we're proposing a 30 cents differential between the homeowner and the nonhomeowner."

Hannemann said he also doesn't want to burden businesses with a tax rate increase. "At the end of the day ... the private sector has to be robust. We don't want to compound the challenges they face."

HOMEOWNER TAX

Council Chairman Todd Apo and Budget Committee chairman Nestor Garcia both said they want to take a harder look at the situation before signing off on Hannemann's property tax plan.

"The council's going to obviously take a serious look at both sides of the ledger in this budget, both on the expense side and on the revenue side," Apo said.

Garcia said the Budget Committee is still trying to determine how many people are in the so-called "homeowner" class, consisting of owner-occupants, and who should be in it.

"Until that's explained to the satisfaction of the members, I'm not quite sure where we're going with the nonhomeowner classification or their property tax rate," Garcia said.

According to the Hannemann administration, there are 250,000 homeowners on O'ahu and 120,000 of those are nonoccupant owners.

Lowell Kalapa, of the Tax Foundation of Hawai'i, said proposing that only investors and second-home property owners shoulder the bulk of a property tax increase is disingenuous and will end up hurting renters.

"It hides the true cost of operating our city," Kalapa said. "He thinks he's heaping on people who don't vote for him."

What the mayor is forgetting is that 41 percent of the state's population rents, he said.

Hannemann said rents have decreased in recent years as the economy has dipped. "We have always maintained that ... (rents are) market driven," he said. Landlords won't pass on additional costs "in a depressed market where people are going struggling. It ain't going to happen."

Through most of the past year, the administration has been warning of a $140 million shortfall in next year's operating budget.

Yesterday, Hannemann said the shortfall was reduced by $36 million because property tax assessments did not decline as much as expected. Meanwhile, the city has been able to gain an additional $20 million through restructured debt service.

One major component of the balanced budget is the withholding of about $43 million in future retiree health fund payments the city had been expecting to contribute to the state's Employer-Union Trust Fund. Hannemann said he wants to delay the payment until the economy improves.

The funds, now held in a city reserve account, would instead be used to pay for the city's current health fund obligations.

Hannemann said the city is not obligated to put the money into the state fund and not doing so won't affect anyone's health benefits. The mayor said he was concerned that state officials might try to raid the EUTF to balance the state budget.

Another way the city is saving money is continued budget restrictions on departments, totaling $18 million. Overtime and personal service contracts are to be cut an additional $7 million.