STAND. COM. REP. NO. 3389

                                   Honolulu, Hawaii
                                                     , 2000

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




Honorable Norman Mizuguchi
President of the Senate
Twentieth State Legislature
Regular Session of 2000
State of Hawaii

Sir:

     Your Committee on Ways and Means, to which was referred H.B.
No. 1900, H.D. 1, entitled: 

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

begs leave to report as follows:

     The purpose of this bill is to provide supplemental
appropriations for the executive branch for fiscal year 2000-
2001.

OVERVIEW

     At the dawn of the Twentieth Legislature in 1999, one thing
was abundantly clear to elected officials -- Hawaii's voting
community wanted change.  Their message was in response to the
State's languishing economy which saw fewer tourists visiting our
islands than in 1991, record bankruptcy filings and state
personal income growth that ranked almost dead last in the
nation.

     Last year, your Committee was determined to make the hard
decisions, to streamline government operations and cut red tape
to help turn the economy around.  With the support of the Senate,
your Committee sought to change state government's basic focus
and functions by:

     (1)  Being accountable for delivering services to the
          general public in a more cost-effective manner;

 
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     (2)  Becoming entrepreneurial in the delivery of services to
          the general public; and

     (3)  Facilitating Hawaii's economic recovery by supporting
          businesses to compete in the local and global economic
          marketplace -- primarily through tax reductions and
          targeted business incentives.

     These changes were incorporated into the Senate's fiscal
1999 financial plan and provided the impetus to support moving
the State's economy in an upward trajectory, as evidenced by a
recent report from a distinguished local economist:

     (1)  The gross state product increased in 1999 by 2.5
          percent with the real growth rate estimated between 2.0
          and 2.5 percent;

     (2)  Inflation expectations for the Honolulu Consumer Price
          Index in 2000 is estimated at 1.0 percent;

     (3)  Tourism arrivals are predicted to grow between 2.5 to
          4.0 percent this year;

     (4)  Job growth, which has been nil of late, is forecast to
          grow at 0.5 to .7 percent; and finally

     (5)  All major Hawaii macroeconomic aggregates -- personal
          income, employment and total visitor arrivals -- moved
          to levels higher than during the early 1990's cyclical
          peaks.

     These more optimistic indicators are confirmed by the
Council on Revenues' revised March 2000 projections, which
reflect a brighter revenue outlook for fiscal years 2001 through
2006, and Tax Department reports reflecting tax revenue increases
of $114 million by the end of June 2000, as compared to the same
period last year.

     As much as your Committee would like to believe that
economic recovery is finally well underway, we remain cautiously
optimistic.  Your Committee finds that many fiscal issues that
could "break the bank" lurk just past the current fiscal
biennium.  Collective bargaining pay raises, health fund and
retirement system obligations, and State hospitals' budget
shortfalls are just a few such issues.

     Additionally, as we have so painfully learned over the past
ten years, our economic success has been inextricably linked to
visitor industry fluctuations, and the respective economies on

 
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the mainland and Asia.  Since, as an island state, we have no
control over world economies, we must find other ways to ensure
that we mitigate the after-effects of Asia's economic woes, as
well as position ourselves to oversee our future fiscal needs and
obligations.

     Your Committee proposes to retain a fiscally prudent
approach to budgeting.  In crafting this year's supplemental
budget request, your Committee was guided by four basic
objectives:

     (1)  Positioning Hawaii for success in the New Economy;

     (2)  Developing a literate and competent workforce able to
          compete in the global marketplace;

     (3)  Preserving needed educational, health, and human
          services at the community level; and 

     (4)  Maintaining a fiscally prudent approach to executive
          branch spending.

Positioning Hawaii for Success in the "New Economy"

               Only ten percent of the current Fortune
               500 companies will survive the next ten
               years.  The rest will shrivel to a
               fraction of their former selves because
               they won't make a successful transition
               to the customer-centric Web economy.

                              Jakob Nielson, renowned
                              Web guru

     As Robert D. Atkinson and Randolph H. Court of the
Progressive Policy Institute explained it, "[t]he U.S. economy is
undergoing a fundamental transformation at the dawn of the new
millennium.  Some of the most obvious outward signs of change are
in fact among the root causes of it: revolutionary technological
advances, including powerful personal computers, high-speed
telecommunications, and the internet.  The market environment
facilitated by these and other developments in the last decade
and a half has been variously labeled the "information economy,"
"network economy," "digital economy," "knowledge economy," and
the "risk society."  Together, the whole package is often simply
referred to as the "New Economy.""

     A new global economy based on knowledge, ideas, and risk-
taking is the reality our State must embrace.  According to

 
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Atkinson and Court, Hawaii ranked 26th in the nation among states
that exemplify the principles of the New Economy.  If Hawaii is
to lessen its heavy dependence on tourism and capitalize on new
and emerging technologies, our State must take steps now to make
a successful transition to the New Economy.

     Led by the Senate, the 1999 Legislature passed the landmark
Omnibus Technology Bill (Act 178, Session Laws of Hawaii, 1999).
Private industry across the nation has given this visionary law
high marks.  Indeed, the new law has already generated results
with the attraction of new high-tech firms like Axean Pacific and
Pacific Internet Exchange (as well as expansion of local start-
ups like Worldpoint Interactive, Adtech, and many others), to
Hawaii.

     In the current session, the Senate has continued to position
Hawaii for success in the New Economy with a package of bills
designed to give Hawaii businesses and its residents a more
sharply-honed competitive edge.

     To support the transition into a digital economy, your
Committee on Ways and Means has funded:

     (1)  Efforts by Department of Commerce and Consumer Affairs
          in its launch of an Internet Portal to access Hawaii's
          government services online with $250,000 to increase
          Internet access at Hawaii public libraries;

     (2)  Support for Campaign Spending Commission's transition
          to a web-based server for the 2000 elections with
          $125,000 from the Hawaii Election Campaign Fund; and

     (3)  Investment of $3 million to complete the State's Next
          Generation Network which will provide a new high speed
          multiservice network to link state/county government
          users and external users while saving telephone costs.

     Your Committee has also remained steadfast in its support of
Hawaii's existing businesses and economic engines, both emerging
(e.g., biotechnology, call centers, and diversified agriculture)
and established (e.g., visitor industry and military).

Developing a Literate Workforce for the New Economy

     Education for our children, as well as for displaced workers
who must retool their skills to keep pace with the growing demand
for computer literacy, has changed forever.  Currently, there are
190,000 information technology positions vacant across the
country.  By the year 2005, it is estimated that more than

 
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750,000 information technology positions will go unfilled because
of lack of qualified workers.  Even in established industries
like tourism or health care, the use of technology has forever
changed the way in which businesses operate -- whether in making
hotel/air travel reservation online or reviewing medical
diagnoses via telemedicine.

     This means that, in response to the changing demographics of
employment in the twenty-first century, businesses and workers
are demanding new skills and rapid-response delivery of those
skills.  Likewise, our schools must move beyond the traditional
book and classroom delivery and embrace a technologically-
connected model for learning.  Consequently, people will need to
be taught how to learn via the "Net" as well as learning the
basic disciplines of given skill sets.

     To that end, your Committee has endorsed the following
Administration initiatives in the supplemental request:

     (1)  Funding to support the Department of Education's
          "E-school" matching funds to leverage against a $10
          million National Science Foundation grant;

     (2)  UH-Hilo's Workforce Training initiatives at a level of
          $1.54 million;

     (3)  One million dollars each for the University of Hawaii's
          College of Engineering, School of Medicine, and College
          of Business Administration so that their program are
          directed towards building the skills for 2000 and
          beyond;

     At the same time, however, your Committee recognizes that
much of the emphasis on building skills for the New Economy will
be misplaced if we do not commit ourselves to providing a healthy
and safe learning environment for our children.

     Your Committee finds that the department of education's
school facilities are suffering from a staggering $240 million
backlog in repair and maintenance projects.  Senate Bill 3026 has
identified three mechanisms to tackle the existing backlog, fund
ongoing maintenance needs, and give schools the flexibility to
address minor repairs in-house.  In another measure, House Bill
2901, the Senate has targeted various funding sources to provide
an additional $44 million towards school repair and maintenance
in FY 2001.  Your Committee believes that these general funds
will provide greater benefit in addressing the repair and
maintenance of schools because of the following:


 
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     .    General funds can be used on all projects, not just
          those that qualify for general obligation bond funding.

     .    General-funded projects will provide immediate
          improvement to most pressing needs of the learning
          environment.

     .    General-funded projects will provide immediate visual
          impact, restoring the pride students, parent, and
          employees have for their schools.

     The increased $44 million will bolster the existing $25.4
million contained in the department of accounting and general
services and an additional $1 million in general obligation bond
funds, thereby bringing total funding for school repair and
maintenance to an unprecedented level of support of over $70
million.

Providing and Preserving Services at the Community Level

     Your Committee has long been committed to "flattening out"
government, e.g. bringing dollars and decision-making closer to
the recipients of government services.

     Ultimately, the economy (whether "old" or "new") is about
people.  Government's obligation is to provide a greater degree
of resources to people at the community level in the most cost-
effective manner possible.- maximizing the long-term gain.  Your
Committee focused on funding which will help build a strong
foundation for families and communities.

     Specifically, your Committee adopted this approach in the
health and human services arena by:

     (1)  Restoring general fund support for Healthy Start, peer
          education, dental hygiene services, and STD/AIDS
          programs;

     (2)  Funding for such community health programs as the
          Waianae Coast Comprehensive Program ($885,433), Molokai
          General Hospital ($850,000), and Kahuluu Hospital
          ($350,000); and

     (3)  Requiring the Department of Human Services to maintain
          FY 2000 Medicaid payment levels for acute and long-term
          care providers for FY 2001 and to report back to the
          2001 Legislature on federal Medicaid legislation before
          implementing DRI and ROE reductions.


 
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     In lower education, where steps to meet the requirements of
the Felix Consent Decree have been fraught with difficulty, your
Committee listened to the concerns raised by parents, educators,
health care professionals, principals, and others over their
growing frustration over workloads that were spiralling beyond
their control.  Your Committee responded by consolidating the
Felix requests for new positions and funding, and requiring the
Department of Education to allow school complexes to determine
how Felix support staff should be allocated at the school
district level and require Comprehensive School Support Services
to provide educational assistants, student activity coordinators,
speech pathologists, and psychologists according to school
district needs.  The districts can decide how best to allocate
their share of $6,744,899 for these purposes.

     Your Committee also provided additional Parent/Community
Networking Center funding for Maui and Kauai, and clerical
support at the school level.

Adopting a Fiscally Prudent Budget

     A recent editorial in one of Hawaii's daily papers
perceptively noted that, despite the upturn in tax revenues,
State government and the Legislature should "stay the course" and
"hold down spending whenever and wherever possible" while
developing a State budget that is "sensible, forward-looking and
in tune with today's needs."

     The editorial recognized the potential impact of large
collective bargaining pay increases for Hawaii public employee
unions and concluded that "[t]he ultimate goal is to reshape
government spending so it is more in tune with current resources"
and "[t]hat goal remains whether or not there has been a slight
uptick in collections."  We agree.

     Accordingly, your Committee has balanced the demand for
expanded services with the need to insure that state government
can pay for its current services without incurring future budget
shortfalls.  The Senate's draft of H.B. No. 1900 is therefore
only slightly higher than the FY 2001 supplemental request,
despite the fact that more than $29.5 million was added to the
Supplemental Request in the form of Governor's Messages and other
recent additions.  Your Committee is also mindful of the fact
that over $56 million in emergency appropriations are being
funded for FY 2000.

Capital Improvements Projects


 
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     Your Committee believes that increasing the use of bond
funds beyond current levels would place undue burden on the
future of Hawaii.  Thus, your Committee has prioritized the
limited supply of bond funds for competing projects in education,
economic development, employment, environmental protection,
health, social services, culture and recreation, and public
safety.  While your Committee believes it has provided for the
highest priorities in each of the aforementioned areas, the
improvement of educational facilities is undoubtedly our highest
priority.

     Your Committee strongly believes that the legislative branch
of government, as the branch most closely tied to individual
communities, must reflect those community needs in identifying
State capital improvement project priorities.  Your Committee
regards community input as vital to the betterment of public
school facilities.  In Act 91, session laws of Hawaii 1999, the
legislature appropriated funds for 41 school projects, of which
31 were proposed in this year's executive supplemental budget as
candidates for lapsing.  Your Committee has carefully listened to
school administrators, teachers, parents, and students and has
restored 22 of the projects that were proposed for lapsing.  Your
Committee has also initiated new projects and believes that the
total restored and proposed projects represent the priorities of
the community. 

     Your Committee also faced proposed lapses in the University
of Hawaii's budget, and has restored funding for such crucial
projects as the University of Hawaii Center at West Hawaii and
the campus water distribution system for Honolulu Community
College.  In addition, your Committee has provided $1 million in
general obligation bond funds for a laser laboratory that will
research the application of laser technology in manufacturing,
medicine, space, and the environment.  In order to provide a safe
and healthy learning environment, your Committee has also
included $29.1 million in general obligation bond funds for
facilities repairs and infrastructure improvements for the
University of Hawaii statewide.

     In tackling the substantial needs of public school and
University of Hawaii facilities, your Committee found funding
sources that had not been considered previously.  Where
departments have agreed that the deferral of funding will have
minimal or no impact, your Committee has redirected such funds
towards education-related projects.


 
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Legislative Oversight and Accountability

     Over the past several years, the Legislature has become
increasingly concerned over the number of emergency appropriation
requests and court mandates in such areas as Hawaii State
Hospital and compliance with the Felix Consent Decree.  Your
Committee strongly believes that the State must do a better job
of fully meeting its obligations in these areas, as well as
budgeting more effectively to insure that program needs are met
in a timely, cost-effective manner.

     Both the Senate and House of Representatives directed the
Auditor to review current Department of Education and Department
of Health efforts to meet the Felix Consent Decree, and have
undertaken an independent, preliminary assessment of the
Department of Health's Hawaii State Hospital consent decree
compliance.  In doing so, both chambers have sought independent,
external review to evaluate how well the State is achieving the
most cost-effective use of taxpayer dollars to meet court-
mandated service levels.  For example, in provisos 21.4, 23.2,
and 29.1, the Senate has directed the Auditor to oversee matters
in the Department of Health and Department of the Attorney
General covered in recent audits.

     Your Committee believes that such joint efforts by both
chambers of the legislature will provide early assistance to the
Executive in identifying areas of concern, and increased
likelihood that consensus-driven solutions will be successful.
Similarly, in areas involving disbursements from special,
revolving and trust funds, your Committee has identified a number
of areas in which increased legislative oversight will yield
greater accountability, and cost-effective decisions on executive
agencies' parts.


EXECUTIVE BUDGET SUMMARY

Education

     Overall, your Committee added $20,015,788 to the FY 2001
budget for Department of Education.  Highlights include:

     .    $4.4 million for new special education teachers;

     .    $10 million in additional resources for special
          education and Felix compliance efforts (includes
          $767,000 increase in federal spending ceiling); and


 
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     .    $4 million for instructional support, including $3
          million for Hawaii Contents and Performance Standards
          and Standards-Based Assessment System programs and $1
          million for (Governor's message 3/3/00) Hawaii
          Networked Learning Communities program.

Health

     Your Committee has responded to such critical-need areas as:

     .    Positions and $11.1 million for expanded community-
          based adult mental health services, to meet the
          requirements of the Hawaii State Hospital consent
          decree.  Thirty-two positions and $4.37 million were
          also allocated to the court monitor and expanded
          quality assurance functions, as set forth in the terms
          of the Hawaii State Hospital Settlement Agreement.

     .    Additional general fund subsidy of $13 million to
          Hawaii Health Systems Corporation to meet its payroll
          shortfall, and help stabilize FY 2001 cash flow
          requirements.

Public Safety

     Your Committee has deleted the Executive's request for a
general fund appropriation of $6,500,000 for a "debt service
reserve for a new 2,300 bed prison located on the mainland."
These funds were intended to show the State's good faith in
negotiations for the construction of such a facility.

     Your Committee finds that there is a little enthusiasm for
such a mainland prison.  By contrast, there is considerable
interest in building such a facility in Hawaii, especially if it
truly serves the community's desire to provide meaningful
rehabilitation for those in need of such services.  Since the
$6,500,000 is not needed or requested for the Executive's
alternate plans to build a facility in Hawaii, your Committee has
deleted the appropriation and redirected the funds to more
immediate needs such as repair and maintenance of educational
facilities statewide.

     Your Committee also added $183,000 to provide cameras to
increase safety and security for the Public Safety Departments
Halawa Correctional Facility.


 
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University of Hawaii

     .    Added $3 million to University of Hawaii at Manoa and
          $1 million to University of Hawaii Community Colleges
          for new technology initiatives;

     .    Restored $1.5 million in Governor's restrictions to the
          University to allow hiring for vacant positions;

     .    Added $300,000 to promote single parents on welfare to
          seek education to ensure their success and leave the
          welfare system;

     As affirmed by the record of votes of the members of your
Committee on Ways and Means that is attached to this report, your
Committee is in accord with the intent and purpose of H.B. No.
1900, H.D. 1, as amended herein, and recommends that it pass
Second Reading in the form attached hereto as H.B. No. 1900, H.D.
1, S.D. 1, and be placed on the calendar for Third Reading.

                                 Respectfully submitted on behalf
                                 of the members of the Committee
                                 on Ways and Means,



                                 ________________________________
                                 CAROL FUKUNAGA, Co-Chair



                                 ________________________________
                                 ANDREW LEVIN, Co-Chair

 
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