STAND. COM. REP. NO.  1056-08

 

Honolulu, Hawaii

                , 2008

 

RE:   H.B. No. 2500

  H.D. 1

 

 

 

Honorable Calvin K.Y. Say

Speaker, House of Representatives

Twenty-Fourth State Legislature

Regular Session of 2008

State of Hawaii

 

Sir:

 

     Your Committee on Finance, to which was referred H.B. No. 2500 entitled:

 

"A BILL FOR AN ACT RELATING TO THE STATE BUDGET,"

 

begs leave to report as follows:

 

     The purpose of this bill is to appropriate supplemental funds for the operating and capital improvement costs for the Executive Branch for Fiscal Year (FY) July 1, 2008, through June 30, 2009.

 

     In total, this budget appropriates $5,306,197,741 in general funds and $10,773,987,822 in all means of financing for FY 2008-2009.

 

Introduction

 

     Over the past two years, the Legislature seized upon an unprecedented opportunity to invest strategically in Hawaii's future.  The Legislature was able to provide over $256,000,000 in targeted tax cuts.  These tax cuts struck a balance between supporting those with the greatest need and providing relief to all taxpayers.

 

     During this time of economic growth, the Legislature was able to invest in human capital and the environment by supporting many core functions of government that had been negatively affected under tight budgets in the past.  Your Committee was able to provide stable, base funding for areas such as:

 

 

 

 

 

 

     Strong revenue projections indicated an opportune time for investment of capital in critical areas of need, particularly in education.  The Legislature provided $340,000,000 for improvements to the physical infrastructure of schools within the Department of Education (DOE) and the University of Hawaii (UH).

 

     A year ago, your Committee warned that "[i]n recent years, government spending has grown dramatically: 44 percent over the last four years alone.  Such growth is simply unsustainable over the long term."

 

     Recent statistics confirm what your Committee and economists have been predicting – that Hawaii's robust economy is beginning to slow.  The Quarterly Statistical & Economic Report published by the Department of Business, Economic Development, and Tourism (DBEDT) on February 26, 2008, lists some potentially troubling facts, including:

 

 

 

 

 

     Given these statistics, it is imperative that fiscal conservatism be practiced when deciding funding levels for government programs.  While public expectations continue to be high, the Legislature will remain vigilant and scrutinize how taxpayer dollars are spent.

 

     Despite a natural tendency to spend extravagantly when resources are available, last year your Committee began the difficult process of scaling back expenditures to avoid more dramatic, painful cuts to critical government services.  This approach was highly criticized by key people in the Governor's office, who claimed that the Legislature should have spent more and provided more tax cuts.

 

     Two weeks after adjournment sine die of the 2007 Regular Session, a commentary entitled "Legislature 2007:  It was Not a Very Good Year," was published in the May 15, 2007, edition of The Honolulu Advertiser.  In the commentary, the Governor's senior policy advisor complained that the Legislature didn't do enough, specifically criticizing the Legislature's decision not to meet several of the Administration's spending and revenue reduction proposals.  It was revealed that the Governor wanted to:

 

 

 

     In other words, the Legislature did not approve $431,000,000 in spending and revenue reductions that the Governor wanted.  Seven months later in her state-of-the-state address on January 22, 2008, the Governor stated that, "…although the economy remains fairly strong, the bottom line is that since May of last year when the Legislature adopted the biennium budget, tax revenue estimates have declined by $353,000,000."

 

     Had the Legislature followed the Governor's spending plan, Hawaii would now be facing a $784,000,000 shortfall.

 

     Continuing with the approach established last year, your Committee has diligently scrutinized every funding request and provided a balanced financial plan by cutting $67,500,000 from the $5,300,000,000 Executive budget, a 1.27 percent reduction.

 

     The Governor's senior policy advisor concluded the Honolulu Advertiser commentary by claiming, "It is my hope that we will see more constructive behavior in the 2008 Legislative session.  The Lingle-Aiona Administration remains...willing to engage in an honest discussion of public policy issues.  This is the way to advance the public's business – before another Legislative session wastes precious time."

 

     Your Committee, through a memorandum dated February 6, 2008, and sent to all department heads, attempted to work with the Administration to determine where best to impose cuts to the budget.  However, contrary to the public statements made by the Governor's office, attempts to work with the Administration proved fruitless.  In a memorandum dated February 19, 2008, received by your Committee in response to a request to all agencies to determine the impact of a three percent or six percent reduction to their discretionary budgets, the Administration stated that, "we cannot comply with this request."

 

  Section 37-68, Hawaii Revised Statutes, delineates the responsibilities of every agency in state government, as it relates to the budget of the state of Hawaii.  Paragraph (2) requires each agency to:

 

Make available to the legislature and any member or committee of either house of the legislature, all documents and information as may be requested.

 

Your Committee therefore finds it troubling that the Administration is unwilling to comply with the law.

 

     However, despite the lack of response by the Administration, reductions to the budget still need to be made.  To that end, your Committee has imposed four percent reductions to most departments' general fund discretionary budgets.

 

     These reductions are mostly being taken from each department's administrative program.  It is not the intent of your Committee to reduce each department's administrative programs to the point of crippling them.  However, without the cooperation of the Administration, your Committee made the best decisions it could.  It is intended that the departments determine where to take these reductions and transfer money internally to meet the fiscal requirement of aligning expenditures with revenues.  Certainly, the lack of cooperation from the Administration makes the process more difficult than it need be.

 

     In addition to four percent discretionary reductions, your Committee has removed many positions in state government that have been vacant since June 30, 2007, or longer.  These positions have been vacant for at least eight months, yet the funds are still budgeted and possibly being spent.

 

     Consideration was given to those areas with court-ordered mandates or other areas of real or potential concern.  In addition, vacancies that were being filled with 89-day hires were left in the budget.  Your Committee looked at all means of financing in making its vacancy reductions.  In this budget, vacancy reductions total $7,129,526 in general funds and $16,861,087 in all means of financing, eliminating 162.45 permanent positions from state government.  To put this amount in perspective, a report generated by the Department of Human Resources Development on February 18, 2008, indicated that a total of 2,620 permanent positions in state government were vacant, resulting in a total of $86,800,000 in all means of financing and $50,400,000 in general fund appropriations.

 

     There will be those who say that these reductions are too austere or that state government will shut down.  However, your Committee is of the opinion that there are enough resources, if managed well, in the Executive Branch's existing budget.  Your Committee notes that at the end of FY 2006-2007, the Executive Branch had not spent an amount in excess of $115,000,000 in general fund appropriations.  Your Committee further notes that various federal grants in excess of $1,500,000,000 are received by the Executive Branch.

 

     This budget does not contain any frivolous new proposals, but fulfills the basic needs to ensure sustainability.  Such sustainability is needed, for while Hawaii's economy continues to grow, there are ominous signs on the horizon.  Indeed, your Committee would be remiss if it failed to soberly face the challenges ahead.  As a result, your Committee has crafted a balanced budget that reflects the economic realities before us, while providing for the critical needs and demands of our communities, with a focus on:

 

 

 

 

 

 

Your Committee continues to take a realistic, prudent, and fiscally responsible approach to balancing competing demands for resources in the development of this supplemental budget.

 

 

Department Highlights

 

 

Department of Business, Economic Development, and Tourism

 

     In an effort to assist Hawaii's energy conservation efforts and to look at alternatives to reduce Hawaii's dependency on oil, your Committee has approved the Department of Business, Economic Development, and Tourism's (DBEDT) request for a bio-energy program manager and associated funds to support the bio-energy program.

 

 

Department of Human Services

 

     Your Committee recognizes the ongoing issue of homelessness and affordable housing in Hawaii.  Thus, the $4,300,000 funding request by the Department of Human Services (DHS) for homeless services has been approved.  The funding request includes:

 

·         $400,000 for Building 36 at Kalaeloa, to provide for 72 studio units;

 

·         $1,500,000 for Villages at Maili, to provide for 80 family apartment units;

 

·         $550,000 for Kahikolu in Waianae, to provide emergency and transitional housing for 262 persons; and

 

·         $1,850,000 for support to existing contracted services. 

 

     Your Committee finds that the Hawaii Public Housing Authority's (HPHA) ability to manage its finances needs improvement.  Though your Committee recognizes that HPHA is a relatively new agency established in 2006 as the result of the split of the former Housing and Community Development Corporation of Hawaii into two separate agencies, it is problematic when a program that receives large amounts of funding is unable to consistently provide accurate financial data and budget projections.  Under the leadership of the new executive director, your Committee looks forward to HPHA improving its fiscal monitoring ability.

 

     In a continuing effort to support the Hawaii Youth Correctional Facility's (HYCF) compliance with the February 7, 2006, Memorandum of Agreement with the United States Department of Justice, all of HYCF's requests for additional staff and funding to "protect incarcerated youth from harm and provide proper access to medical care," has been approved.  Your Committee has high expectations of HYCF, and will continue to closely monitor its progress.

 

     The State Children’s Health Insurance Program (SCHIP) is an essential program, providing health coverage to thousands of children in Hawaii.  This program is funded from the State's general fund, with matching federal funds.  Unfortunately, SCHIP has not yet been reauthorized by our federal government, and funding has only been extended until March 1, 2009.  With the potential loss of federal funds, health coverage for some children may be jeopardized.  Therefore, given this uncertainty, your Committee has approved the DHS request to convert $585,000 in federal funds to $585,000 in general funds, to prevent any loss of coverage.

 

     Your Committee finds it disconcerting that the Med-Quest Administrator position continues to remain vacant since May 2007.  In addition, there is lack of transparency regarding the status of the search for a new Administrator.  Attempts to determine where the department is in the hiring process have produced no useful information.  Filling this position should be a top priority for the department, given its size and importance, with expenditures exceeding $1,000,000,000 annually.

 

     Your Committee remains concerned with regard to the questionable use of Temporary Assistance for Needy Families (TANF) funds, and would like to iterate that the top two purposes of the TANF program are to:

     (1)  Provide assistance to needy families; and

 

     (2)  End the dependence of needy parents by promoting job preparation, work, and marriage.

 

TANF funds should be used more responsibly with greater emphasis placed on these top priority purposes.  Of foremost importance is assisting those who need help the most, while remaining within the scope of the TANF program.  Lastly, it is important that TANF funds are expended with a greater level of foresight and thought, to ensure that TANF reserve levels are maintained and available for the lean years that are sure to come as the economy slows.  For example, if present expenditure levels are continued, the TANF reserve will be completely depleted by the middle of FY 2009-2010.

 

 

Department of Health

 

     Your Committee is pleased to recognize the hard work of the Department of Health (DOH) to ensure that the State of Hawaii remains a healthy place to live and work while dealing with the harsh realities of an increasingly complex health care system and a growing need for health care support.

 

     Your Committee acknowledges the critical statewide necessity of timely and reliable access to emergency medical services.  However, serious concerns have been raised by yearly requests for additional funding to ensure access to these services.  Last year $4,811,639 in general funds was provided for FY 2007-2008 and $5,529,757 was provided for FY 2008-2009.  This year, DOH is requesting an emergency appropriation of $1,807,539, as well as an additional $4,159,533 for FY 2008-2009.  Although the requested funding has been provided, your Committee believes more information must be made available on the reasons for these dramatic increases and what measures DOH is taking to address the rising costs in the years to come.

 

 

University of Hawaii

 

The University of Hawaii (UH) is the backbone of Hawaii’s future: higher education is key to the economic growth, technological advancement, and overall success of our state.  Recent studies show that the UH System contributed $1,660,000,000 to the State's economy in 2006 and represents a higher portion of the State's gross domestic product than agriculture, manufacturing, media, and information technology.  The UH System increases each dollar of general funds appropriated by the Legislature by $1.88.  Additionally, every dollar of general funds appropriated to the UH System generates $4.25 in business sales, $2.59 of labor earnings, and $0.26 in tax revenues.

                  

Recognizing the importance of investing in higher education, your Committee has appropriated an additional $6,992,577 in general funds to the UH System for its operating expenditures, in spite of tight fiscal constraints.  Funds have been appropriated to the various campuses as follows:

 

·         $3,433,632 to UH-Manoa;

 

·         $415,685 to UH-Hilo;

 

·         $12,500 to UH-West Oahu; and

 

·         $3,130,760 to the UH community colleges.

    

     Your Committee acknowledges the increasing number of cases of mental illness and trauma among students at public schools and universities, sadly punctuated by the recent tragedies at Virginia Tech, Louisiana Technical College, Northern Illinois University, and five other schools over the past year.  Your Committee has therefore provided funds for additional clinical psychologists, increasing the counseling capacity at UH-Manoa by 40 percent.  Furthermore, in reaction to security concerns following these incidents and the rise in campus crime, your Committee has also provided 21 positions and $3,330,077 for additional resources to improve and expand security throughout the UH System.  These funds will assist the various campuses to create security plans, implement emergency communication systems, and improve the visibility and response of security officers.

 

 Your Committee is also aware of the vital role played by UH libraries in improving the educational capital and research capacity of the state.  Therefore, your Committee has provided eight additional positions and $2,500,000 to improve access to, and availability of, library materials and electronic resources.  

 

Outdated and failing equipment is challenging the capacity of community colleges to provide specialized programs in fields such as medicine, radiology, and information technology.  Ensuring that students have access to up-to-date equipment should be a top priority as the future workforce of the state needs adequate qualifications and experience to succeed in a rapidly-changing economy.  Your Committee has therefore appropriated $820,000 to repair, replace, and provide new equipment for these programs.

 

Your Committee takes note of recent audits of the UH System and has serious concerns about insufficient accountability within the UH System.  Your Committee has found inaccurate reporting of special funds and vacant positions, some of which have been vacant for over eight years, making it difficult to gauge the actual needs and funding shortfalls of the UH System.  In response, your Committee strongly encourages better reporting of the use of general funds and profitable school-related non-general funds.  Your Committee has also appropriated funds from special and revolving funds for UH purposes as follows:

 

·         $622,000 to support student retention, success, and school accreditation initiatives;

 

·         $350,000 to maintain classroom technology; and

 

·         $590,000 to support security needs.

 

 

Department of Education

 

Recognizing the importance of transparency and accountability in state government, your Committee is concerned about the continued inclusion of debt service, retirement benefits, and health benefit payments in the Department of Education's (DOE) budget.  In actuality, these costs are passed through the Department of Budget and Finance.  There have been many misconceptions that this money is at DOE’s disposal.  Your Committee finds it duplicitous that the Administration claims to have bestowed on DOE an additional $62,000,000, when these are funds to pay fixed costs, funds to which DOE does not have access.

 

Your Committee recognizes that our public education system must better address the needs of its homeless students.  Currently, the only homeless concerns resource teacher (HCRT) in the state is based on Oahu and has the difficult task of overseeing the identification and assistance of an estimated 2,000 homeless students across the entire state.  This HCRT is also tasked with ensuring that DOE is in compliance with federal standards mandated by the McKinney-Vento Homeless Assistance Act of 1987.  To address this pressing need and assist in these efforts, your Committee has funded two additional HCRT positions.

 

Your Committee finds that despite problems with existing charter schools, and before garnering the funds needed to operate additional schools, the Charter School Review Panel (CSRP) authorized new start-up charter schools.  Such actions create an untenable situation that leaves little choice but to use funding from already stretched resources to prevent the closure of these new schools.  In the future, the CSRP should demonstrate more prudence and fiscal responsibility in its management of charter schools by waiting until funding is approved before authorizing additional start-up charter schools.

 

 

Department of Land and Natural Resources

 

     Your Committee remains devoted to supporting the objectives set forth by the Department of Land and Natural Resources to conserve, protect, develop, and use the natural and cultural resources of Hawaii.  Issues relating to the conservation of Hawaii’s unique natural resources continue to be of concern as more residents and visitors take part in recreational hunting, fishing, and boating.  Furthermore, as usage of state parks and hiking trails continues to increase, so does the number of violations of the laws that protect Hawaii’s natural resources in public and restricted areas. 

 

     The Division of Conservation and Resources Enforcement is responsible for enforcing these laws to ensure that natural areas, historic sites, refuges, unencumbered state lands, and sanctuaries are protected and preserved.  Current staffing levels at the division are not sufficient to provide adequate resource protection.  Your Committee has approved $823,298 from special funds for an additional 11 Conservation and Resources Enforcement Officer positions to be assigned across the state to increase the enforcement capabilities of the division.  Additionally, your Committee has approved $247,566 in special funds for four clerk typist positions, who will strengthen the division’s capabilities to route complaints to officers in the field and handle calls and complaints from the public.

 


Department of Defense

 

     The Hawaii National Guard (HING) provides an invaluable service to the state as first responder in the face of manmade or natural disasters.  Your Committee is deeply concerned about the current state of repair of this vital organization’s facilities.  The maintenance of many HING facilities is seriously lacking in areas ranging from bad ventilation of its heating and air conditioning systems to leaky roofs and unsafe storage buildings.  It seems that this is not an issue of appropriating money but rather an issue of cash flow.  In the past few years, the damage caused to Hawaii by natural disasters including flooding, high winds, and earthquakes has placed a strain on both HING and the state as a whole.  Funding required for necessary disaster recovery has reduced the availability of money to address the crumbling infrastructure of HING facilities.  Although HING has secured funds from the Federal Emergency Management Agency and other resources to reimburse its disaster recovery efforts, this funding comes too late, and structural problems have gone unrepaired, amplifying the problem.  Therefore, your Committee has appropriated an additional $1,156,708 for HING toward its efforts to respond to and mitigate the disasters Hawaii faces and hopes that a more permanent solution may be developed to enable HING to ensure the integrity of its facilities and its ability to properly respond to disasters.

 

     The Office of Veterans Services (OVS) has worked hard to ensure that Hawaii’s veterans’ cemeteries are maintained to standards equal to federal regulations.  While some of Hawaii’s veterans’ cemeteries are works-in-progress, your Committee feels assured that the problems of the past will remain in the past and OVS will provide due diligence in addressing any future issues with our veterans’ cemeteries.  To help address the concerns at our veterans' cemeteries, your Committee has appropriated $170,329 in general funds. 

 

     Unfortunately, OVS has not been as diligent in addressing the needs of our returning soldiers.  It has failed to submit to the Legislature a report requested in Section 59 of Act 213, Session Laws of Hawaii 2007, the General Appropriations Act, requiring OVS to conduct a comprehensive assessment of the adequacy of mental health services, medical and rehabilitative services, and job training and employment services for veterans of the conflicts in Iraq and Afghanistan.  Considering the multitude of resources at our state’s fingertips, it is troubling that OVS has failed to produce this comprehensive report outlining the effects that returning soldiers will have on the community so we may ensure that these dedicated people and their families receive the services needed as a result of their sacrifice and service to our country.

 

 

Department of Taxation

 

     The Department of Taxation (DOTAX) collects tax revenue for the state.  The digitization and upgrading of tax systems have greatly improved the Department’s efficiency and increased state revenues.  During the implementation of the Integrated Tax Information Management System from 1999-2004, DOTAX generated $252,000,000 in revenue that would not have otherwise been collected while only spending $53,000,000 in implementing the new system.  Furthermore, DOTAX's initiative to digitize tax forms has improved compliance and accessibility to tax information.  DOTAX has also completed a large project in administering the collection of the new county surcharge tax.  

 

     To further assist DOTAX, your Committee has appropriated $422,000 in general funds to improve the electronic storage of, and increase electronic access to, tax information.  While your Committee is concerned over increasing expenditures in the administration of the county surcharge tax, an additional $233,000 has been appropriated to improve its efficiency by addressing software and inputting errors, as well as expected compliance issues.

 

 

Capital Improvements Program

 

     For FY 2008-2009, the Administration requested $693,185,000 in general obligation (G.O.) bond-funded projects and $1,556,022,000 in projects funded by all means of financing.  Given the significant uncertainties surrounding the state of our national and local economy, your Committee has reduced this amount and approved $512,341,000 in G.O. bond-funded appropriations as part of a total of $1,463,295,000 in all means of financing for capital projects for FY 2008-2009.  In other words, your Committee has reduced the requested G.O. bond-funded amount by $180,844,000 or 26 percent.

 

     While remaining fiscally responsible, your Committee has first sought to address the critical health, safety, and general welfare needs of our entire state.  To mitigate the growing threat of invasive species entering the state through our airports and harbors, your Committee has approved $6,500,000 in G.O. bond funds for joint biosecurity inspection facilities at the Honolulu International Airport and Honolulu Harbor.

 

     In addition, your Committee remains dedicated to improving and enhancing the public education infrastructure throughout the state.  While remaining mindful of the need for new and modern facilities, your Committee has focused on improving the deteriorating conditions of existing facilities that continue to detract from the overall experience of our students.  Therefore, $120,937,000 in all means of financing has been provided to assist the DOE in addressing various projects of an imminent and critical nature, including $25,000,000 for cesspool removal. 

 

     Your Committee has further demonstrated its dedication to the critical needs of public education by providing $185,236,000 in all means of financing for capital improvements for the UH System.  Of this amount, nearly $66,000,000 in G.O. bonds has been provided to assist all UH campuses, including community colleges, in addressing health, safety, and building-code requirements, as well as their increasing repair and maintenance backlog. 

 

     During the hearing on this measure, your Committee received testimony from numerous people in support of a new law-school building for the William S. Richardson School of Law, as well as funds to design the Performing Arts Facility for the Department of Theater and Dance.  Your Committee recognizes the worth of these projects but was unable to provide any funding for them.

 

     Finally, your Committee has responded to the needs of the homeless and low-income populations within our state by infusing a combined total of $20,000,000 into the Rental Housing Trust Fund and the Dwelling Unit Revolving Fund.  Your Committee has also approved $26,000,000 in G.O. bonds to complete the purchase of the Kukui Gardens Rental Housing Complex.

 

 

Economic Concerns

 

     Future fiscal conditions, the immediate needs of the state, and national economic trends were key factors in the fiscally conservative approach that your Committee took in crafting this supplemental budget.

 

     A report by the Center on Budget and Policy Priorities (CBPP) dated February 25, 2008, found that 25 states expected to face budget shortfalls for FY 2008-2009.  In addition, a March 3, 2008, analysis also done by CBPP found that "there are twenty-seven states that clearly are in need of relief now."  While Hawaii is not one of these states, it would be unwise to ignore these warning signs present in other states.

 

     In this budget, your Committee removed unneeded vacant positions, scrutinized the Executive's requests for additional funding, and imposed up to a four percent cut to the discretionary parts of the budget.  Your Committee has taken appropriate measures to ensure that state government is able to provide essential services while at the same time preparing for an economic slowdown and the subsequent decrease in revenues.

 

     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. 2500, as amended herein, and recommends that it pass Second Reading in the form attached hereto as H.B. No. 2500, H.D. 1, and be placed on the calendar for Third Reading.

 

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

 

 

 

 

____________________________

MARCUS R. OSHIRO, Chair