STAND. COM. REP. NO. 868-00__

                                    Honolulu, Hawaii
                                                     , 2000

                                    RE: H.B. No. 1900
                                        H.D. 1




Honorable Calvin K.Y. Say
Speaker, House of Representatives
Twentieth State Legislature
Regular Session of 2000
State of Hawaii

Sir:

    Your Committee on Finance, to which was referred H.B. No.
1900 entitled: 

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

begs leave to report as follows:

OVERVIEW

    After nearly a decade of facing tremendous economic
challenges, struggling with hard decisions, and making a
concerted effort to alter attitudes and restructure our
institutions, your Committee finds that Hawaii now stands better
poised and able to chart its own unique course into the new
millennium. 

    This new course is influenced by changing social and economic
trends.  We have experienced a resurgence in community
participation.  Recognizing the positive results that can be
achieved when people collectively work toward shared goals, your
Committee embraces and encourages community responsibility and
accountability.

    Also, hope has been renewed with the recent announcement of
modestly positive economic indicators.  Based on these
indicators, your Committee has adopted a cautiously optimistic
outlook for the state's economy.  It is with this awareness and
sense of responsibility that your Committee approached the
budget.


 
 
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HISTORICAL PERSPECTIVE

Economy

    Over the past decade, the bleak economic outlook required
that your Committee diligently control the cost of government.
To this end, the Legislature has not only limited spending, but
also initiated several tax relief packages in order to stimulate
economic growth.  As a result, we are now beginning to feel the
effects of an economic recovery. 

    Through eight separate tax measures passed by the Legislature
in the 1998 and 1999 Regular Sessions, both businesses and
individuals will pay $2 billion less in taxes.  Although this
resulted in a $2 billion decrease in anticipated general funds,
our efforts to control government spending has allowed us to
maintain basic state programs and services, while providing this
necessary tax relief.  Because of this effort, we are now on the
verge of true economic growth.  It is imperative for the State to
maintain this course of limited government spending in order to
fully reap the benefits of these tax measures. 

Regulatory Reform

    In keeping with the theme of less government, last year your
Committee consolidated the majority of Department of Commerce and
Consumer Affairs' (DCCA) funds into a single Compliance
Resolution Fund and allocated $2.5 million of franchise tax
revenues into the Fund for each fiscal year beginning July 1,
1999.  

    Other funding efforts included appropriations of $500,000
over two years to replace the Central Registry of Business
Filings Information System in the DCCA with a state-of-the-art
information system.  These and other consolidations in government
services have played, and will continue to play, an important
role in Hawaii's economic recovery.

    Your Committee is hopeful that these and other regulatory
reforms have laid the foundation for a stronger and more
prosperous economy in the years ahead.

CURRENT FISCAL BACKDROP

Economy

    At pre-session briefings, economists identified a number of
factors that appear favorable for Hawaii's economy:


 
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  · The nation's economy is in its eighth year of continued
    expansion and the Japanese yen is stronger since January
    1999, both of which contributed to an increasing number of
    visitors to Hawaii;

  · Hawaii's unemployment rate dropped a full percent during
    1999;

  · Permits issued for private construction projects indicate
    that Hawaii's construction industry will see positive growth
    in 2000; and,

  · All major economic aggregates in the state - personal income,
    employment, and total visitor arrivals - are showing positive
    growth compared to prior years.

    Reviewing these indicators, a leading local economist found
that Hawaii's economy has moved from a recovery phase into an
expansionary phase. 

State Revenues

    The Governor's Supplemental Budget request was based on the
Council on Revenues' (Council) September 1999 revenue
projections.  At the Council's December 1999 meeting, it
maintained a state general fund revenue growth rate forecast of
negative 1.1 percent for fiscal year 2000 and revised its
forecasts upward for fiscal years 2001 through 2006, signaling a
brighter revenue outlook.

    There is an additional indication of a turnaround.  Last
year, the Council observed that Hawaii was in the midst of a
deflationary period.  As part of its December 1999 projections,
however, the Council noted that the economic outlook for Hawaii
is beginning to improve. 

    Though these economic signals are positive, there are still
uncertainties.  The economies of Japan and California are major
factors in the fate of Hawaii's economy.  Japan's economy is
showing signs of recovery, but remains fragile.  At the same
time, the growth of California's economy cannot be sustained
indefinitely.  These two factors, combined with the fact that the
full impact of the tax relief measures will not be felt for
several years, give your Committee reason for cautious optimism.  

BUDGET OVERVIEW

    This budget provides expenditure authorizations for $6.43
billion in all means of financing.  Of this total, general funds

 
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account for $3.13 billion.  These numbers represent a 3.0 percent
increase in all means of financing and a 3.4 percent increase in
general funds.  Your Committee's analysis has shown that these
increases are both within the anticipated revenue growth and
below the level of funding requested by the Administration.

    New appropriations are primarily concerned with meeting the
State's fixed fiscal obligations and addressing the priority
needs of the departments of Education (DOE), Health (DOH), and
Human Services (DHS), as well as the University of Hawaii (UH).
These departmental appropriations are designed to maximize
investment in human capital, satisfy basic needs, encourage
responsibility, and promote accountability.

Fixed Costs

    General fund increases in requirements for fixed costs
generated by all departments are as follows:

    (1)  Employee retirement system     $56 million;

    (2)  Health fund premiums           $20 million; and,

    (3)  Debt service                   $ 9 million.

    Increases in general funds for key departments from fiscal
year 2000 to fiscal year 2001 are as follows:

    (1)  Department of Education        $10 million;

    (2)  University of Hawaii           $ 6 million;

    (3)  Department of Health           $17.5 million; and,

    (4)  Department of Human Services   $ 5 million.

Department of Education

    The education of our youth remains your Committee's highest
priority.  Accordingly, your Committee is committed to working
with the DOE to not only search for new resources, but also to
explore ways to reallocate existing DOE resources to areas of
greater need.

    The DOE's operating budget has been increased by $21 million,
to approximately $1.02 billion, for all means of financing.  The
capital improvements budget provides $79 million for fiscal year
2001.  These additional funds are designed to: achieve compliance
with the Felix Consent Decree; staff new schools and facilities;

 
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and provide general support to the greatest extent possible.
These funds will further the State's investment in human capital. 

    In the classroom, your Committee has allocated $2.6 million
to reduce the student/teacher ratio in kindergarten through
second grade from 21:1 to 20:1.  An additional $3.5 million is
earmarked for 146 new teachers (regular and special education)
and assistants.  The sum of $5.2 million has been set aside to
continue the "every child counts" policy, where special education
students are included in class ratio formulas.  All of these
measures will place more teachers in the classroom to reduce
class size and improve the learning experience for each child.

    In school offices, your Committee has dedicated an additional
$500,000 for clerical support.  Additional reporting
requirements, increased personnel and student enrollment, the
shift to school-based services and decreased support at the state
and district levels have all increased the demand on
administrative services.  The allotted funds will help to
alleviate an increasing administrative burden as well as
demonstrate further support both in and out of the classroom.  

    To provide additional educational opportunities to a broader
segment of the population, your Committee has provided an
additional $1.5 million to purchase books and material for State
public libraries, bringing the total general fund contribution to
the library book budget to $2.2 million.

    Your Committee has also provided $45 million in general
obligation bond funds - the first installment of a three-year
$135 million program - to address the repair and maintenance
needs of public schools.  This major commitment of resources will
help ensure safe and adequate facilities for our children.

    In addition, your Committee has provided $700,000 for the
Youth Challenge program supported by the DOE and implemented by
the Department of Defense.  This program provides training in
life-coping and employment skills by utilizing a military model
for high school dropouts.  This program affords youths an
opportunity to either complete their graduate equivalency exam or
earn credits to be mainstreamed back to their home schools to
earn a diploma. 

    To promote greater fiscal responsibility for the DOE, your
Committee has allowed five percent of appropriations to the
school support services program (EDN 150) to be carried over to
the next fiscal year.  This provides schools with greater
budgeting flexibility, and will encourage schools to efficiently
expend funds (H.B. No. 2492, H.D. 1).

 
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    The DOE must also share in the responsibility to actively
seek federal funding to achieve goals unattainable within the
limits of State appropriations.  Accordingly, your Committee has
exempted federal and trust funds from the usual allotment system,
thereby assuring that State funds will not be reduced when the
DOE has secured such funding (H.B. No. 1873, H.D. 2).

    Your Committee aims to promote school accountability by
approving an ambitious overhaul of current accountability
statutes.  The new initiatives require schools to implement an
accountability system that covers students, teachers,
administrators, and all other significant partners in the
educational process.  Furthermore, this new legislation will
require teachers and administrators to undergo continuous
professional growth and development (H.B. No. 1875, H.D. 1).

    To further promote accountability in our schools, your
Committee has also appropriated $2.7 million to complete work
begun last year on the Hawaii Content and Performance Standards.
It is hoped that these standards will provide the means to
measure student and school performance as well as create an
incentive for excellence.

    Finally, your Committee seeks to work with the Administration
to more accurately reflect the true cost of education.
Therefore, the pro-rata portions of debt service, the Health
Fund, and pension accumulation costs have been incorporated into
the DOE budget, rather than being reflected under the Department
of Budget and Finance.  This will increase the DOE's budget for
all means of financing to $1.30 billion for fiscal year 2001.

The University of Hawaii

    In hand with our attention to lower education, your Committee
is also dedicated to assisting Hawaii's institutions of higher
education.  As the University of Hawaii is focused on attracting
nationally recognized faculty and increasing its autonomy and
responsibility, your Committee has provided the University with
$6 million in additional general funds - for a total of $514.5
million for all means of financing - and $43 million in capital
improvement funds for fiscal year 2001.

    In order to support the quality of the University's faculty,
an investment in human capital is a prerequisite.  To this end,
your Committee has provided an additional $1 million for the John
A. Burns School of Medicine to establish a molecular genetics
program focused on disease prevention.  Given that this cutting-
edge program will specialize in extensive research on genetic
abnormalities, a portion of the funds has been allocated to

 
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attract faculty who are recognized as pioneers in their fields
and to leverage additional funds to UH through external grants.   

    In turn, an investment by the University in a quality
workforce is necessary to attract high-technology business.
Hawaii needs an adequately trained workforce.  Given this, your
Committee has provided an additional $1 million for the Pacific
Center for Advanced Technology Training for the UH Community
Colleges to prepare students to enter the high technology
workforce. 

    In addition, your Committee has provided a total of $565,000
for the Hawaii Small Business Development Center (SBDC) Network
to promote economic development through its seven centers, which
provide counseling, training, research, and advocacy for and on
behalf of small business.

    To support the basic needs of quality instruction, research,
and community programs, your Committee is committed to ensuring
that the physical infrastructure of its facilities are
functional, architecturally sound, aesthetically pleasing, and in
compliance with building and safety codes.  Toward this end, your
Committee has provided $20 million in general obligation bond
funds for UH facility improvements statewide.

    Furthermore, your Committee has provided $1 million in
general obligation bond funds to renovate space in UH Manoa's
Watanabe Hall to house a new laser research laboratory complete
with $9 million in laser equipment provided by the Rockwell
International Corporation.  This laboratory will explore the
application of laser technology in manufacturing, medicine, space
exploration, and environmental science.

    Additionally, to further support advanced technology programs
at UH, your Committee has provided funding for several items.
First, $1.6 million has been set aside to renovate the old Bank
of Hawaii building in downtown Hilo into a "smart building",
complete with meeting rooms equipped with video and voice
conferencing capabilities.  Second, an extra $1 million has been
provided to the UH College of Engineering to help establish the
Hawaiian Center for Advanced Research, which will focus on
wireless communication systems.  Third, an additional $1 million
has been provided to UH to upgrade the College of Business
Administration.  Funds will contribute to the development of new
courses in e-commerce with software for web-based instruction.  

    In support of the University's continued move towards added
responsibility and greater autonomy, your Committee has allowed
the carryover of any general fund appropriations to the next

 
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fiscal year.  This provides UH with greater flexibility in
budgeting by allowing excess funds to be redistributed to high
priority areas (H.B. No. 2062, H.D. 2).

    Your Committee has provided the University with expanded
operating resources.  These resources will improve UH's capacity
to further excel in the areas of established distinction - such
as marine science, astronomy, and agriculture research - as well
as advance into new areas of biomedical research, engineering,
and e-commerce entrepreneurship.  These funds will improve UH and
help diversify Hawaii's economy.

    Finally, as with DOE, the pro-rata portions of debt service,
the Health Fund, and pension accumulation costs have been
incorporated into the UH budget, rather than being reflected
under the Department of Budget and Finance.  This will increase
UH's budget for all means of financing to $628 million for fiscal
year 2001.

Department of Health

    Your Committee believes the basic health needs of Hawaii's
population must be met.  Those individuals who are underinsured
or who live in isolated rural areas continue to live under the
threat that basic health services may not be accessible when
needed.  

    With this concern in mind, your Committee has appropriated
over $2.5 million for nonprofit community health care facilities,
such as Kahuku Hospital, Molokai General Hospital, Hana Health
Center, and the Waianae District Comprehensive Health Center.
These health care facilities are the safety net for those living
in rural areas.

    Your Committee has appropriated $7 million for the Hawaii
Health Systems Corporation, Hawaii's only network of public
hospitals.  Furthermore, an additional $800,000 has been
appropriated to the current $1.3 million budget for basic health
care to 4,800 additional underinsured persons.

    Your Committee also recognizes its responsibility in
providing adequate levels of health care for Hawaii's special
needs population:  children and adults who are mentally ill and
developmentally disabled.  There are three distinct areas where
funds have been provided.  First, your Committee has appropriated
an additional $2 million - for a total of $96.2 million - to
provide child and adolescent mental health services and to
achieve compliance with the Felix Consent Decree.  Second, the
sum of $4.2 million has been provided, in addition to the $11

 
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million in the current budget, to reduce the waitlist for home
and community-based waiver services for persons with
developmental disabilities or mental retardation.  Third, your
Committee recognizes the longstanding nature of the Department of
Justice Settlement Agreement concerning the Hawaii State
Hospital.  In light of this, your Committee has increased the
Adult Mental Health Division budget by $23.5 million to more than
double the present $19.2 million budget for community-based
mental health services for persons with serious mental illnesses. 

    Lastly, national attention focused on Hawaii's progressive
attitude toward the allocation of its Tobacco Settlement Funds,
as outlined in Act 304, Session Laws of Hawaii (SLH) 1999.  Your
Committee remains dedicated to health promotion, disease
prevention, and control of tobacco use, and has therefore
increased the DOH's Healthy Hawaii Initiatives ceiling by $2.9
million in addition to the $9.6 million originally authorized
last year.  To further set a national precedent, your Committee
has specified that State funding of existing health promotion and
disease prevention programs will not be supplanted or diminished
by monies received from the Tobacco Settlement Funds (H.B. No.
2277, H.D. 1).  

Department of Human Services

    Believing that government has a duty to assist those
individuals who are truly in need and lack sufficient resources
for shelter, food, and medical care, your Committee has provided
resources to address people's basic needs.

    To simultaneously protect those who cannot work and to
promote self-reliance, responsibility, and family stability, your
Committee has maintained $122 million in all means of financing -
$51 million from general funds - for funding the Temporary
Assistance to Needy Families (TANF) and Temporary Assistance to
Other Needy Families (TAONF) financial assistance programs.  

    As a further incentive for low-income households to remain in
the workforce and to enable them to fully contribute to society,
your Committee passed a measure to establish a refundable earned
income tax credit.  This tax credit will be available only to
low-income workers and will act as a tax reduction and wage
supplement (H.B. No. 1830, H.D. 1).

    In addition to supporting those in need, DHS must also
safeguard the welfare of all children.  When the removal of a
child from the child's home is deemed necessary for safety
reasons, it is essential that the child is placed in an
appropriate and safe environment.  To this end, your Committee

 
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has provided $3.2 million - for a total of $28.5 million for all
means of financing - for out-of-home child placement costs, which
include adoption and foster care.  

    In continuing your Committee's dedication to safety of
children, $420,000 has been appropriated for the Blueprint for
Change program.  This program will provide for the basic needs of
Hawaii's children by establishing community-based services for
families considered to be at-risk for child abuse and neglect. 

    Along with the growing needs of our children, the needs of
Hawaii's elderly have also grown.  The number of elderly who need
long-term care will continue to grow as the median age of the
population increases.  To enable Hawaii's elderly to remain in
their homes and to prevent or delay institutionalized care, your
Committee has provided an additional $3.6 million for home-based
care services, bringing total appropriations to $68.6 million for
all means of financing.

    As the role of our State government has changed in light of
new social and economic trends, the DOE, UH, DOH, and DHS have
become the focus of this year's budget.  Your Committee believes
that this budget meets the objectives of maximizing investment in
human capital, satisfying basic needs, and promoting
responsibility and accountability.

ECONOMIC DEVELOPMENT

    Achieving the objectives outlined above requires a strong and
healthy economy.  In light of this, your Committee has dedicated
resources to strengthen tourism, assist small to medium-sized
businesses, and support economically underdeveloped areas. 

    Your Committee increased the Hawaii Tourism Authority's
special fund ceiling from $60 million to $61 million to reflect
the optimistic projections of transient accommodations tax
revenues.  The Authority can expend the additional revenues to
promote and market Hawaii as a tourist destination.

    To complement last year's tax measures concerning out-of-
state professional services, your Committee has provided $200,000
for the Center for Asia-Pacific Infrastructure Development.  This
program will assist Hawaii's small to medium-sized planning,
engineering, and development firms to capitalize on business in
the vast Asian infrastructure markets.  The Center will establish
and maintain contacts to facilitate local business access to the
Asian markets.


 
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    Your Committee recognizes the important role played by
Community Based Economic Development (CBED) in creating new
economic activities and diversifying Hawaii's economy.  Over the
past ten years, CBED has assisted rural areas with high
unemployment in revitalizing their economic base, by offering
technical and financial assistance to help build and strengthen
community-based organization's capacities and skill levels.
Therefore, your Committee continues to support the CBED Program
and has maintained approximately $680,000 in funding. 

    To round out budgetary efforts to promote economic growth,
your Committee supports initiatives in both advanced technology
and small business development.  There are two tax incentive
packages (H.B. No. 2607, H.D. 1; H.B. No. 2901, H.D. 1) that
provide income tax relief for advanced technology research and
development related to intellectual property, patents, and
royalties.

    There are three additional measures which focus upon the
Department of Business, Economic Development, and Tourism
(DBEDT):  one encourages DBEDT to focus on high-technology
development (H.B. No. 2500); a second consolidates the High
Technology Development Corporation (HTDC) (H.B. No. 2356, H.D.
1); and the third allows HTDC to better assist high technology
development (H.B. No. 2443, H.D. 1).

    Lastly, your Committee approved a measure to increase the
availability of local products in mainland markets through the
appropriation of funds for manufacturing programs (H.B. No. 1969,
H.D. 1).  This will benefit local small-business by increasing
their exposure in mainland markets.

ISSUES OF CONCERN

    Rising court-mandated costs concern your Committee.  When the
Department of Justice Settlement Agreement was developed in 1991,
it dealt exclusively with the Hawaii State Hospital.  Today,
however, court oversight has expanded to include the entire Adult
Mental Health Division, including its outpatient services.  While
these services are important, the State has been forced to fund
these court-mandated costs at the expense of, and detriment to,
other important services.  

    Moreover, your Committee is not entirely convinced that the
appropriations will, in and of itself, resolve all of the
problems with the Hawaii State Hospital.  Resolution of all
outstanding issues with the Hospital now rests solely with DOH
and its ability to fulfill the clinical requirements that the
federal courts have mandated.

 
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    Of further concern is the potential for the Department of
Public Safety (PSD) to revert to the control of federal court-
mandated consent decrees.  Without sufficient support, it is
possible that PSD will return to its pre-Spear Consent Decree
status:  chronic overcrowding and lack of sufficient programming
and substance abuse treatment programs. 

    In addition to issues surrounding federal court consent
decrees, your Committee is also concerned about the fiscal
operations of the Hawaii Health Systems Corporation.  Every year
since the passage of Act 262, Session Laws of Hawaii (SLH) 1996,
which established the Corporation as a semi-autonomous entity, it
has requested large general fund subsidies.  As a result of Act
262, the Corporation was removed from the State's budgeting
requirements.  This has made it difficult for the Legislature to
have the same comprehensive oversight of Corporation expenditures
as it does with all other state agencies.  The Corporation's
services are necessary to the health needs of Hawaii's citizens.
Nonetheless, without the budget oversight that existed previous
to Act 262, it is difficult for your Committee to assess the
budget requests of the Corporation in relation to those of other
agencies.

    Your Committee believes that the Corporation's ability to
collect on its receivables is key to self-sufficiency.  Even
though patient revenue increased by $4 million between fiscal
year 1998 and fiscal year 1999, cash collections fell by $14
million.  If collections are not maximized, the Corporation will
continue to require large sums of general fund support.  As the
State's fiscal health is still fragile, the Corporation must
strive to achieve self-sufficiency.

    Lastly, the final disposition of grant-in-aid applications
has yet to be determined.  Your Committee has received 68
requests for operating grant-in-aids totaling approximately $22
million and 25 requests for capital improvements totaling
approximately $19 million.  Many of the requests are worthy of
funding.  Your Committee, however, has deemed it appropriate to
revisit these items once the Council on Revenues makes their
March 2000 forecast.  Priorities for grant-in-aids will be
determined through negotiations with the Senate during
Conference.

CONCLUSION

    Your Committee believes it has fashioned a budget that
strikes a balance between fiscal restraint and addressing the
important issues of human capital investment, satisfying basic
needs, promoting responsibility, and encouraging accountability.

 
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    Your Committee has funded court mandates and provided for
basic needs in health and human services as well as appropriated
funds to support economic development.  Your Committee has also
found additional resources to dedicate to education and invest in
technology infrastructure.

    Given this, your Committee believes it has allocated
available resources to those areas of highest priority.  There is
still much legislative work yet to be done and your Committee
stands ready to cooperate with the Senate to produce a fair and
equitable supplemental budget.

    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.
1900, as amended herein, and recommends that it pass Second
Reading in the form attached hereto as H.B. No. 1900, 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