Honolulu, Hawaii
                                                   , 1999

                                 RE: H.B. No. 100
                                     H.D. 1

Honorable Calvin K.Y. Say
Speaker, House of Representatives
Twentieth State Legislature
Regular Session of 1999
State of Hawaii


     Your Committee on Finance, to which was referred H.B. No.
100 entitled: 


begs leave to report as follows:

     The purpose of this bill is to appropriate operating and
capital improvements program funds to the executive branch for
the 1999-2001 biennium.

                     HISTORICAL PERSPECTIVE

    While the rest of the U.S. economy has experienced growth,
Hawaii's economy has not kept pace.  This is due in part to our
historical dependence on the strength of the tourism and
agricultural industries.  Furthermore, the recent foreign banking
crisis in Japan and fiscal problems in several Asian nations have
weakened the yen and other foreign currencies, resulting in even
less visitor arrivals and decreased lengths of stay.  The decline
in tourist dollars has played a major role in state revenue
shortfalls.  As a result, over the past several years the
Legislature has taken steps to bolster both our tourism industry,
as well as other sectors of the economy.

    One year ago, shortly after the Governor submitted the
Administration's supplemental budget to the Legislature, the
Council on Revenues (COR) revised its revenue projections

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downward.  This required the Legislature to cut at least $115
million from the budget. 

    At the same time, based on the recommendations of the
Economic Revitalization Task Force, the Legislature implemented
structural changes to government in an effort to put the state on
the path to long-term economic recovery and growth. 

    Steps were taken to cut government spending by eliminating
non-core programs and consolidating government services.  Based
upon the COR's updated projections, the Legislature worked
diligently and responsibly, cutting over $175 million from the
Administration's original budget request.

    To spur the construction industry and create jobs, the
Legislature increased capital investment spending by approving
the Governor's one-time fiscal biennium 1997-1999 accelerated
capital improvement program (CIP) proposal.  This included over
$1 billion in general obligation bonds, representing a 150
percent increase of planned general obligation bond funding

    Recognizing that short-term solutions are necessary until
long-term solutions can come to fruition, the Legislature created
the Hawaii Tourism Authority (HTA).  The Legislature provided a
dedicated funding source of over $60 million per year - more than
double the amount of funding in prior years - for the HTA to
develop a comprehensive marketing plan and attract more visitors
to Hawaii.

    No state can hope to be successful in the next millennium
without a highly skilled workforce.  One of the key initiatives
recommended by the Economic Revitalization Task Force was to
provide the University of Hawaii (UH) with the autonomy to set
its own course.  With this flexibility, UH can undertake a more
entrepreneurial role in education and research.  The University
will be better able to use its resources to attract students and
academicians from around the world.  Furthermore, autonomy will
allow the University to: develop active partnerships with
international businesses; build networks; increase private
funding; and develop world-class standing in research areas.

    Finally, last year the Legislature implemented the largest
personal income tax cut in state history.  Starting this year,
the tax cut will put over $759 million into the hands of
consumers and small businesses over the next four years.

    Your Committee realizes that it must continue to provide a
better future for business in Hawaii.  A strong, healthy economy

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is vital to the well being of the residents of this state.
However, a strong, healthy economy built without Aloha - built at
the expense of the most needy in our society will soon crumble.

    The driving philosophy of your Committee is that only through
the efforts of people individually and collectively will the
state thrive economically and socially.  Your Committee realizes
that it must provide additional business incentives and
structural changes in order to build upon the accomplishments of
last year.  

    However, your Committee also realizes that the most valuable
resources in the state are its residents.  In other words, an
investment in human capital is the key to putting the State on
the road to long-term recovery, stability, and vitality.

                     CURRENT FISCAL BACKDROP

    Currently, the state's revenue projections appear to have
stabilized, and there are signs of improvement.  The real estate
market seems to be on the upswing, Asia has shown signs of
recovery, and after a brief respite, the U.S. economy remains
strong.  Although the December COR report projects only modest
growth, your Committee believes that this may be an optimistic
sign since this growth has been sustained, despite last year's

    Using this as a starting point, your Committee cautiously
approached the formulation of the 1999-2001 fiscal biennium
budget. Your Committee acknowledges that times remain austere.
Therefore, rather than take drastic actions, your Committee used
this biennium budget to continue the restructuring of government
begun in the previous biennium.  This budget is designed to:

         1)   Spur economic stimulation;

         2)   Empower the citizens of this state to secure their
              own future; and,

         3)   Continue to maintain government responsibility for
              the care and well-being of those who cannot care
              for themselves.

    Additional structural changes along with these goals of
economic stimulation, empowerment, and responsibility, can be
found in other measures that are related to the budget.  In
conjunction with these related measures, your Committee has

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formulated a budget that funds activities to implement these

                      ECONOMIC STIMULATION

     Your Committee understands that the economy is key to the
well-being of individuals, families, and communities.  Therefore,
your Committee has adopted a two-tiered strategy that addresses
immediate economic concerns and plans for long-term economic
success.  Both tiers consider an investment in human capital as
the key to Hawaii's future success.



     Your Committee recognizes that one sign of a strong economy
is a low unemployment rate.  Therefore, your Committee provided
$100,000 for fiscal year 1999-2000 to begin implementation of the
Workforce Investment Act (WIA) of 1998.  Over the next 5 years,
approximately $100 million in federal dollars is earmarked for
workforce readiness training.  In addition, the WIA will
integrate all employment and training activities, including state
apprenticeship programs, and create a one-stop delivery system in
each county. 


     Your Committee acknowledges the significant impact that
small business has on our economy.  However, your Committee also
realizes that there are many obstacles that burden the success of
small business.

     To assist small businesses through the "growing pains"
associated with new ventures, your Committee has appropriated
nearly $1.2 million over the biennium for the establishment of
the Small Business Development program (UOH222).  This program
will house the Small Business Development Center and the Business
Research Library, both of which are specifically designed to
provide support for the creation of new businesses.

     Taking steps to further strengthen reforms from last year,
your Committee has adopted structural changes to Hawaii's general
excise and use tax laws (H.B. No. 375, H.D. 1).  By exempting
from the general excise tax all professional services exported
from Hawaii, and imposing the use tax on all professional

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services imported to Hawaii, Hawaii's professional services
providers will be on a more even playing field with professional
services providers around the world.

     In addition, your Committee has provided funding for the
Business Advocate Program in accordance with Act 168/98.  Funds
will be used to simplify the business registration process and,
more importantly, provide legal services to small businesses to
prepare in-depth studies of the regulatory statutes that are of
utmost concern to the business community.

     Your Committee has also provided incentives for:

     1)   The immediate revitalization of resort areas throughout
          the state in order to increase the attraction of Hawaii
          as a travel destination, and, at the same time, to
          infuse the economy with large amounts of capital
          investments (H.B. No. 136, H.D. 2);

     2)   The construction and operation of aviation training
          facilities, with the goal of establishing Hawaii as the
          preeminent location for training pilots of the next
          century (H.B. No. 1027, H.D. 1); and,

     3)   The establishment and growth of a high technology
          research park, the creation and growth of high
          technology related jobs, and the commitment to invest
          in long-term research and development (H.B. No. 377,
          H.D. 2 and H.B. No. 1683, H.D. 2).

     Your Committee recognizes that Hawaii must be able to
compete effectively in a global economy.  In the competition to
attract businesses with high paying jobs, a well-trained, highly
skilled workforce is not only advantageous, but also required.  



     Your Committee recognizes the important link between
education and the long term viability of Hawaii's economy.  The
availability of a skilled and knowledgeable pool of labor is the
backbone of economic strength.  The role of our public education
system is to instill a strong academic, cultural, and social
foundation in our children so that they may become tomorrow's

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     Your Committee firmly believes that an educational system
without any systematic means of measuring performance cannot be
held accountable to the public.  Therefore, your Committee has
provided $6 million over the course of the fiscal biennium to
revise and implement the Hawaii Content and Performance

     In addition, your Committee understands that our teachers
are currently overburdened by large classes.  Although the
current ratio standards are twenty-one students to one teacher
for grades K-3 and twenty-six students to one teacher for grades
4-12, many classrooms are operating at a much higher capacity.
Your Committee finds that much of this is due to the current
Department of Education policy of not including special education
students in the class ratio formula.  Therefore, your Committee,
in accordance with H.B. No. 855 H.D. 1, has provided funding in
the amount of $4.4 million for fiscal year 1999-2000 and $5.6
million for fiscal year 2000-2001 to support the inclusion of
special education students in the class ratio.

     Your Committee has also provided funding for the opening of
new educational facilities and classrooms.  Included are new
schools at Kapolei, Lihue, and Keaau and new facilities for
Konawaena Elementary, Mililani Intermediate, and Hookena
Elementary.  To support these new buildings, your Committee has
provided approximately $20 million for fiscal year 1999-2000 and
approximately $3 million for fiscal year 2000-2001.

     Finally, your Committee has provided approximately $17
million over the biennium for the Comprehensive Student Support
System.  This system of care will ensure that all students
receive the appropriate level of academic and developmental
support in order to succeed in life.

     Your Committee has continued the Legislature's tradition of
keeping the development and improvement of Department of
Education facilities its top priority.  Over $150 million in
capital improvement funds have been appropriated for facility
improvements and the development of new facilities.  In addition,
your Committee has added to the Administration's request, $10
million in capital improvement funds for miscellaneous school
building improvements to provide for the repairs at existing
public schools statewide.  This funds will supplement the $24
million per year provided in the operating budget for similar


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     As our only state supported higher education system, the
University of Hawaii provides the educational opportunities
required to create a workforce that will continue to support and
stimulate economic growth.  Your Committee has implemented
several measures to ensure that these educational opportunities
are furthered.

     If the state is to create a workforce of highly trained
individuals, accessibility to higher education must exist.
Therefore, your Committee is encouraged by the potential of
distance learning technology to eliminate the transportation
barriers caused by a population dispersed over several islands.
Your Committee has provided over $1 million for the expansion of
UH's technology and distance learning coordination program.  This
effort is expected to provide an additional 300 students with the
opportunity to attain their bachelor's degrees.

     Your Committee has also recognized the critical need to
support research activities of the university system.
Accordingly, the following programs and projects have been
provided for:

     1)   $4.9 million for biotechnology laboratory space for Dr.
          Ryuzo Yanagimachi's cloning research efforts;

     2)   $1.5 million for the School of Ocean and Earth Science
          Technology oceanographic research vessel.  The
          University has recently received a commitment of over
          $45 million from the Federal government for this
          project; and,

     3)   $1.1 million for international ocean and marine
          research joint ventures with Japan, the University of
          California at Berkley, and NASA.  

     To provide for greater flexibility, your Committee also
passed H.B. No. 833 H.D. 1, which further increases the
University's autonomy.  This measure allows UH to obtain up to
$10 million in loans from financial institutions and releases the
university system from the allotment requirements of Chapter 37,
Hawaii Revised Statutes.

     An investment in the education and training of our residents
provides a venue for the most important investment of all - an
investment in human capital.  In this regard, education and
training are essential for sustained economic growth as well as
individual empowerment.

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     In recent years, a paradigm shift has required policymakers
and community leaders to reassess the role of government.  Today,
the role of government includes being a facilitator to work with
communities in addressing needs and challenges.  In this new
relationship, empowerment becomes an essential ingredient.

     Working with communities and allowing them to identify
assets and marshal resources is key to achieving greater capacity
building.  This increases the sense of teamwork, and more
importantly, the sense of community.

     In this process, communities become more confident and are
more willing to be accountable and responsible for creating their
own economic opportunities.  Government, by partnering and
playing a supportive role, allows individuals and communities
greater self-determination, resulting in a stronger sense of


     Your Committee recognizes that the agriculture industry is
essential to the overall viability of the state economy.
Moreover, as a result of several plantation closures throughout
the state, a golden opportunity for transforming and reinventing
the industry presents itself.

     Agriculture currently generates nearly one-half billion
dollars in farm gate revenues alone, and much more when "value
added" products are considered.  The industry provides thousands
of direct jobs statewide, and even more when considering
transportation and other related services.

     To ensure the long term viability and success of diversified
agriculture, and to assist many of the new farmers who have
become part of the agriculture community, your Committee has done
the following:

     1)   Supported the Agribusiness Development Corporation
          (ADC) and enabled it to work with farmers to facilitate
          conversion of former plantation lands to diversified
          agriculture farms.  ADC will assist with maintaining
          infrastructure for water and access to land.
          Approximately $2.3 million in each year of the biennium
          has been provided for the ADC's work.

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     2)   Authorized the Department of Agriculture to issue loan
          guarantees of up to 90%, to make financing more readily
          available to members of the agriculture community,
          especially new small farmers (H.B. No. 978).

     3)   Expanded the type of financial institutions that are
          authorized to provide farm loans.  In addition, the
          number of credit denials that are required before
          farmers can qualify for the Agricultural Loan Program
          has been reduced.  In this manner, the state is
          facilitating access to financial resources that
          currently are not available (H.B. No. 979 H.D. 2). 

     4)   Provided an additional $200,000 to the UH Small
          Business Development Center, to expand its efforts
          to assist small businesses, including small farmers,
          by providing entrepreneurial skills training.  


     The transition from an agrarian to a service-based economy,
resulted in a restructuring of the economic foundation for many
rural communities.  With this transition many agriculture jobs
were lost.  In response to these changes, the Legislature created
the Community-Based Economic Development (CBED) program.  CBED
provides communities with technical and financial assistance,
that empowers the community and allows for the planning and
creation of economic opportunities.

     CBED and its central concept of empowerment, reinvents how
government is responding to the changes occurring in the economy,
and provides critical support for greater self-determination.
Continued funding for CBED will allow more communities to play a
greater role, and have more control in economic development


     Your Committee believes that, parallel to traditional
democratic values of helping the young, the needy, and the
elderly, government has an obligation to assist those that lack
the sufficient resources for shelter, food, medical care, and
other essentials of daily living.  It is in this spirit that your
Committee, despite limited resources, has provided for core
services.  Fulfilling our responsibility to end social injustice
and providing sufficient health and human services is not only

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sound social policy, but the means toward a higher quality of
life for all.


     Your Committee recognizes that Hawaii's citizens are faced
with an overwhelming financial burden of caring for our elderly
and disabled.  The number of elderly and disabled who need long-
term care (LTC) will continue to grow as the population ages.
With increased demand and increased costs, more and more families
can be expected to endure financial hardships unless an improved
method of financing LTC is developed.  Your Committee believes
that we must preserve personal assets, promote individual peace
of mind, and relieve family economic pressure.  Therefore, your
Committee has provided a LTC tax credit (H.B. 170 H.D. 2) to
facilitate the purchase of private LTC insurance policies.

     Hawaii has long been considered the "Health State".
However, your Committee is concerned with the growing population
of medically uninsured.  At present, the state is providing
funding for the care of approximately 5,000 medically uninsured;
unfortunately, there are many more who remain without coverage.
Therefore, your Committee has provided an additional $500,000 for
this effort.  This increase will allow 3,000 additional persons
to receive health care. 

     Additionally, your Committee appropriated $1 million for
federally qualified health centers (FQHC).  Since the advent of
QUEST, FQHC's have had to adjust to a managed care capitated
payment rate.  However, because health care costs are normally
much greater than capititated rates, many FQHC's are finding it
difficult to continue their current levels of service.

     Rural health care facilities protect and promote the
physical well-being of their communities.  Without these
facilities, rural communities would be left vulnerable with
impaired access to health services, due primarily to their
geographic isolation.  In light of difficult economic and fiscal
conditions, your Committee finds it imperative to sustain current
levels of service to these rural health care facilities.
Therefore, your Committee has appropriated $2.2 million for both
years of the biennium for hospital and health care subsidies at
Hana Medical Center, Kahuku Hospital, Molokai General Hospital,
and Waianae Coast Comprehensive Health Center.

     Due to age, disability, or blindness, some individuals are
no longer able to maintain self-sufficiency.  To protect these
individuals from the misgivings of society, and assist those

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least able to fend for themselves, your Committee has
appropriated an additional $1.1 million for fiscal year 1999-2000
and an additional $1.4 million for fiscal year 2000-2001 to
provide cash benefits for food, clothing, shelter, and other
essentials of daily living.

     Another extremely vulnerable population are infants and
children, specifically those who are from indigent families or in
need of special services.  Perhaps the most defenseless of this
population are children between ages 0-3 who are biologically or
environmentally at-risk.  Your Committee has appropriated $2.5
million in each year of the biennium to provide screening and
services for this population.  This undertaking will increase
screening from 8,000 to 14,000 children, thereby screening every
child born in the state.

     In authorizing funding for the aforementioned health and
human services programs, your Committee has pledged continued
support for a "safety net" for Hawaii's citizens.  Your Committee
will remain vigilant in honoring this commitment to those less
fortunate, even while addressing other areas of concern in the

                        ISSUES OF CONCERN

    Throughout your Commmittee's deliberations, a number of
issues have weighed heavily on the budget.


    One major concern of your Committee is that the state will
not meet compliance with the Felix Consent Decree by its deadline
of June 30, 2000.  Since 1995, a significant barrier to
compliance has been the lack of coordination and communication
between the Department of Health (DOH) and the Department of
Education (DOE).  In addition, turnover in leadership and key
personnel for each department has created a lack of a clear cut
direction toward the compliance effort.  Given the importance and
urgency of the decree, these issues can no longer serve as
barriers to the state's ability to meet its responsibilities.
Addressing these issues is prerequisite to any further steps
toward compliance.

    Another concern in regard to this issue is fiscal
accountability of the departments.  For fiscal biennium 1999-2001
alone your Committee has appropriated over $150 million in new
funding.  Your Committee hopes that the DOE and DOH will enact
cost-effective measures which will mitigate the decree's effect

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on the budget, while still complying with the state's obligations
to children with special needs.


    Your Committee accepts the fact that it is government's
responsibility and obligation to ensure the safety and security
of its people.  However, your Committee also realizes that a
shortage of prison beds continues to plague Hawaii's criminal
justice system.  As a result overcrowded prisons have become the
norm not the exception.  

    Your Committee is concerned with the early release of
prisoners who have yet to be rehabilitated.  This in turn leads
to consistently high recidivism rates.  To mitigate this
dangerous situation, your Committee provided funding for the
opening of almost 500 new beds over the course of the biennium.
Nevertheless, with nearly 1,200 prisoners housed in mainland
facilities, our prison system remains approximately 500 prisoners
over operating capacity. 


    Your Committee also remains cautious about managing the
state's debt limit in future fiscal years.  During recent years,
the Legislature authorized the issuance of approximately $200
million in general obligations bonds annually for capital
projects.  However, during the 1997-1999 fiscal biennium, the
Governor recommended a one-time authorization of $500 million in
general obligation bonds for each fiscal year.  The reasons
behind this strategy were:  to kick-start the economy, take
advantage of low interest rates, and support a struggling
construction industry.  The Nineteenth Legislature approved the
budget with the understanding that future CIP budget requests
would revert to the $200 million per fiscal year level.
Accordingly, your Committee was disappointed to receive an
inflated CIP request for $300 million per fiscal year for the
1999-2001 fiscal biennium.  Analysis indicates that if the
Legislature approves a $600 million general obligation bond
funded biennium CIP budget, the state's debt service will rise
significantly.  Preferring to have the state live within its
means, your Committee has scaled back the Governor's request by
$100 million per fiscal year to bring the CIP budget back to
moderate levels.


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                                 Page 13

    Bolstering the state's economy must be the driving force
behind our fiscal actions.  However, your Committee has also
taken this opportunity to develop ways to invest in the people of
our state by focusing on the educational needs of our young
people, retraining our workers to remain competitive in today's
marketplace, and helping those who truly need assistance to

    As affirmed by the record of votes of the members of your
Committee on Finance that is attached to this report, your
Committee is in accord with the intent and purpose of H.B. No.
100, as amended herein, and recommends that it pass Second
Reading in the form attached hereto as H.B. No. 100, H.D. 1, and
be placed on the calendar for Third Reading.

                                   Respectfully submitted on
                                   behalf of the members of the
                                   Committee on Finance,

                                   DWIGHT Y. TAKAMINE, Chair