STAND. COM. REP. NO. 1541

                                   Honolulu, Hawaii
                                                     , 1999

                                   RE:  H.B. No. 150
                                        H.D. 2
                                        S.D. 1




Honorable Norman Mizuguchi
President of the Senate
Twentieth State Legislature
Regular Session of 1999
State of Hawaii

Sir:

     Your Committees on Education and Technology, Ways and Means,
and Judiciary to which was referred H.B. No. 150, H.D. 2,
entitled: 

     "A BILL FOR AN ACT RELATING TO EDUCATION,"

beg leave to report as follows:

     The purpose of this bill, as received by your Committees, is
to provide for an appointed board of education.

     The purpose of this bill, as amended, is to amend the
constitution to provide clear accountability for the public
schools to the board of education (BOE).  Specifically, the BOE
would be provided the authority, resources, and the
responsibility to govern the public schools similar to the other
political subdivisions of the State, including its own taxing
authority.

     Prior to the hearing, your Committees circulated a proposed
Senate Draft.  Testimony was submitted in support of the proposed
Senate Draft by the Chairperson of the Board of Education,
University of Hawaii Professional Assembly, Hawaii State Teachers
Association, Hawaii Government Employees Association, Hawaii
Government Employees Association Retirees Unit, Superintendent of
Education, State Librarian, and three individuals.  Testimony in
opposition was submitted by the State Representatives from the
Sixth and Seventeenth Districts, Hawaii Congress of Parents,
Teachers and Students, and seven individuals.  Informational

 
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testimony was submitted by the Department of Taxation, Department
of the Attorney General, Chamber of Commerce of Hawaii, Hawaii
Business Roundtable, and the Tax Foundation of Hawaii.

     Specifically, the proposed Senate draft amends the
constitution to make the department of education a political
subdivision with the board of education in charge.  The bill
treats the board of education as the equivalent of a county
council.  The bill gives the department all functions, powers,
and duties necessary to provide for the establishment, support,
and control of the statewide system of education subject to
general laws.

     On July 1, 2002, after ratification of the constitutional
amendments in the general elections of 2000, the department is
allowed to:

     (1)  Issue general obligation bonds under the full faith and
          credit of the political subdivision.  The department is
          required to pay all principal and interest of general
          obligation bonds that have previously been issued by
          the State that directly benefit the public school
          system;

     (2)  Use all powers regarding the income tax, except the
          taxation of pension and social security income and
          change the rates of the income tax after June 30, 2005,
          upon a two-thirds vote of the board membership.  The
          proposed Senate draft:

          (A)  Freezes current income tax deductions, exemptions,
               and tax credits until July 1, 2007, except for
               changes made to them in the Internal Revenue Code,
               and allows new or increased deductions,
               exemptions, and tax credits to be established at
               any time; and

          (B)  Directs the department of education to contract
               with the department of taxation for the
               administration of the income tax until 2012; and

     (3)  Use all powers necessary to enact a retail sales tax
          and to set the rate of the tax upon a two-thirds vote
          of the board membership.

     In addition, the proposed Senate draft:

     (1)  Requires the council on revenues to prepare public
          revenue estimates for the department of education;

 
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          requires the board of education to consider the
          estimates in preparing the budget, recommending
          appropriations and revenues, and controlling
          expenditures; and requires the board to make public the
          reasons why any budget or expenditure will exceed
          estimated revenues; and

     (2)  Provides that the auditor may audit the department of
          education.

     On July 1, 2002, the proposed Senate draft amends statutes
to provide:

     (1)  For a department of education fund in the state
          treasury under the control of the board;

     (2)  That income tax revenues go to the fund; and

     (3)  That the council on revenues will give revenue
          estimates to the board of education.

     The proposed Senate draft also:

     (1)  Repeals the transfer of general excise taxes to the
          state educational facilities improvement special fund
          and the fund; and

     (2)  Repeals the provisions placing the department of
          education in the state departmental structure and the
          creation of the department.

     Finally, the proposed Senate draft provides for a
restructuring and transition committee to make recommendations on
restructuring the department and amending statutes.

     Your Committees find that after years of attempting to make
the department of education fully responsible through lump sum
budgeting, school-by-school budgeting, and school and community
based management, it is necessary to take the last step toward
autonomy by making the department of education a political
subdivision with its own taxing powers.  In this manner the
department will be responsible for raising its own taxes and will
be responsible for spending the money it raises.  If the public
disapproves of the manner in which the department operates, it
can vote the board members out of office or keep them.  There
will be a direct relationship between the public which pays for
education and the department which provides the education.


 
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     The public will no longer have to look to the legislature or
the executive branch for reasons why the department of education
is performing or not performing.  If test scores remain low, the
public will know exactly who is responsible.  If the test scores
go up, again the public will know exactly who is responsible.

     Your Committees note that many mainland school districts
have taxing power.  Unlike those mainland jurisdictions where the
taxing power is small as are the school districts, the Hawaii
department of education is a statewide system and needs statewide
taxing power.  Your Committees find that revenues from the income
tax approximate the cost of lower education, including debt
service.  In addition, federal funds are received.  Your
Committees believe that the department of education can be self
supporting without the use of tax increases or the adoption of a
retail sales tax.

     Your Committees note that there may be other funding options
for the department of education such as dedicating a set
percentage of the general fund or the excise tax and those should
be considered as this proposal receives further study.

     The restructuring and transition committee will review the
current structure and make up of the department and recommend
statutory amendments necessary to transform the department into a
political subdivision.  Your Committees envision that the
transition period will be more than two years, however, the
autonomous department can be operating within two years.  After
two years, the department may contract with state agencies to
furnish services now furnished for free.  Experience under these
contracts will allow the department to discover which areas
should be subject to contract and which would be more efficiently
done internally.

     Your Committees believe that this proposed Senate draft is
one means to address the obvious shortcomings in the governance
of our public schools.  Your Committees believe that
accountability is the crux of the problems with the board and the
department of education.  Higher reading scores and improved
student performance in general are the main issues of concern and
your Committees do not believe that the current structure of the
board and department of education is capable of delivering those
improvements.  As this proposal continues through the legislative
process, your Committees believe that the 1992 report of the
Governor's Task Force on Educational Governance should be
reviewed for further governance options.

     Your Committees have amended the measure, as received, H.B.
No. 159, H.D. 2, by deleting its contents and substituting the

 
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proposed Senate Draft.  The proposed Senate Draft has been
amended by:

     (1)  Keeping the corporate income tax with the State instead
          of transferring it to the Department;

     (2)  Limiting the retail sales tax to tangible personal
          property and capping it a 1 cent per $1 of value;

     (3)  Adding a department of education general fund
          expenditure ceiling;

     (4)  Deleting the department of education fund as
          unnecessary and amending section 16 of the bill as
          proposed to reflect that deletion and the retention of
          the corporate income tax;

     (5)  Providing that the department of education does not
          have police power;

     (7)  Providing that the transition committee shall make
          recommendations regarding immunity from legal process
          for the department and the members of the board of
          education in a manner similar to that granted to the
          counties;

     (8)  Clarifying the application of the Constitution's debt
          limit provisions to the department of education in such
          a manner that the department is separate from the State
          but the same provisions that limit the State's debt
          will limit the department's debt; and

     (9)  Making technical, nonsubstantive changes to conform the
          amendments above and for clarity.

     As affirmed by the records of votes of the members of your
Committees on Education and Technology, Ways and Means, and
Judiciary that are attached to this report, your Committees are
in accord with the intent and purpose of H.B. 150, H.D. 2, as
amended herein, and recommend that is pass Second Reading in the
form attached hereto as H.B. 150, H.D. 2, S.D. 1, and be placed
on the calendar for Third Reading.

 
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                                   Respectfully submitted on
                                   behalf of the members of the
                                   Committees on Education and
                                   Technology, Ways and Means,
                                   and Judiciary



____________________________       ______________________________
CAROL FUKUNAGA, Co-Chair           DAVID Y. IGE, Chair



____________________________
ANDREW LEVIN, Co-Chair



____________________________       
AVERY B. CHUMBLEY, Co-Chair



____________________________
MATTHEW M. MATSUNAGA, Co-Chair

 
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