Honorable Calvin K.Y. Say

Speaker, House of Representatives

Twenty-First State Legislature

Regular Session of 2001

State of Hawaii

Sir:

Your Committee on Finance, to which was referred H.B. No. 200 entitled:

begs leave to report as follows:

The purpose of this bill is to appropriate funds for the operating and capital improvement costs of the Executive branch for the fiscal biennium July 1, 2001 through June 30, 2003.

In deliberating on this bill and other bills that affect state finances, your Committee faced a number of major policy issues that limited its ability to fund the priority items of the House of Representatives. Although economic indicators suggest that the economy is growing and revenues are increasing, your Committee, while remaining cautiously optimistic over the improving economy, nevertheless took a prudent course in developing this budget.

To better understand the enormous tasks undertaken by your Committee, it would be instructive to summarize the major policy issues so that the resource allocation decisions made in this bill can be placed in their proper perspective. These policy issues are discussed in Part I of this committee report. Part II describes the various strategies employed previously in crafting a fiscally-sound budget, and further re-examines these methods for the upcoming biennium. Part III is an overview of the major items in the budget, and Part IV summarizes the funding levels provided in this budget.

Deliberations and decisions on this State budget began at a time when the economic picture appears to be improving. While your Committee is buoyed by the general fund revenue projections of the Council on Revenues with December 2000 forecasts of 6 percent growth for fiscal year 2000-2001 (FY 2001), 5.5 percent increase for fiscal year 2001-2002 (FY 2002), and 5.8 percent for fiscal year 2002-2003 (FY 2003), your Committee is nevertheless mindful of the growing expenses of major fixed cost items and other nondiscretionary cost items.

The fixed cost items include payments for debt services, the Employees’ Retirement System’s pension accumulation and social security insurance payments, and the employer’s portion of the Public Employee’s Health Fund payments. These "must fund" fixed cost items account for over $195.6 million in general fund growth for FY 2002 and over $310.7 million in general funds for FY 2003.

Debt service payments are, by constitutional requirement, the first payments of the State. These payments go to repay investors’ principal and interest for bonds sold to finance the development of public facilities such as schools, university buildings, State parks, etc. Additional debt service requirements for FY 2002 are $29.7 million and $88.9 million for FY 2003. Total payment requirements are $417.1 million for FY 2002 and $476.3 million for FY 2003.

Payments into the Employees' Retirement System (ERS) are based on actuarially determined requirements to fully fund the State employees’ pension requirements within sixteen years. While long-term plans call for no additional State payments into the ERS fund after sixteen years, the total amount of payments required to meet obligations to retired state employees and their beneficiaries is $250.2 million for FY 2002 and $306.1 million for FY 2003. This represents a $138.2 million increase for FY 2002 and $194.1 million in FY 2003.

Health fund payments are required to pay for the State employer's share of health benefits for its employees and beneficiaries. Increasing costs have been attributed to more enrollments and the expense in renewing contracts with health care providers. As a result, an additional $27.7 million is required each year, for a total cost of $260.1 million for each year of the biennium.

These three fixed costs total $927.4 million or 26.9 percent of the FY 2002 general fund operating budget and $1.045 billion or 29.1 percent of the FY 2003 State’s general fund operating budget.

In recent years, the State has been forced to comply with a number of federal court orders. These orders have had enormous price tags attached, further straining the State’s fiscal resources. The Felix Consent Decree has been the costliest to the State since it was entered into by the State in FY 1995. Since FY 1995 $1,354.3 billion has been expended by the Departments of Health and Education to provide services to children and adolescents for special education and mental health services. The total budget requested for the two departments for this 2001-2003 fiscal biennium totals $716.4 million.

While recognizing its obligation to provide for the mental health needs of our young people, your Committee remains concerned with the ever-inflating costs of compliance, the usurping of the Legislature's oversight authority, and the lack of accountability by the Departments of Education (DOE) and Department of Health (DOH).

Of utmost concern is whether the children are actually being serviced adequately and cost-effectively by the departments. Your Committee notes with alarm the growing number of children under this consent decree and questions the departments' efforts in mainstreaming as many children as possible back into the regular classroom.

One of the major shortcomings noted by the Legislative Auditor is the lack of a definition of what constitutes a "Felix child." Without such a definition, it would be difficult for the departments to assess whether a child should receive the needed services and to track the child’s progress. To address this issue, your Committee has passed H.B. No. 1678, H.D. 1, that defines a "Felix child."

To further underscore the Departments' problems with compliance, both DOE and DOH have requested emergency fiscal year 2001 funding. However, after careful review, your Committee believes that the original requests of both departments have been improperly inflated under the guise of Felix-related costs. The decrease in the emergency request from January for the DOE and the DOH's decrease from $56.8 million to $44.6 million appears to indicate a fundamental flaw in their methods of estimating fiscal requirements. Moreover, many of the requested new positions have equivalents in the current State budget but remain vacant.

Your Committee has uncovered significant savings from the amount requested for the DOE's mental health services efforts. The original request of the Governor was for $43 million in each year. Your Committee balanced costs with effectiveness, reducing the request to $29 million in FY 2002 and $37 million in FY 2003 by eliminating recruiting and salary costs for unavailable personnel, requests for unwarranted expenditures, and duplication of efforts within the DOE. The budget provides funds for school-based mental health services, year-round student service coordinators, a functional integrated special education database system, recruitment of needed professionals, services tailored for Maui District, and a realistic number of educational assistants.

The cornerstone in compliance is well-educated teachers with a full understanding of mental health services to assist the children under the Felix decree. The Governor’s budget submittal contains several mental health-related professional development schemes. Your Committee intends to work with the DOE to combine these requests to share resources and reduce duplication.

Your Committee also encountered similar difficulty with the DOH. Upon questioning by your Committee, the DOH revised its emergency funding requests on numerous occasions over the last two months, each revision containing inconsistencies which leads to questions about DOH’s commitment. Your Committee is disappointed at the lack of fiscal responsibility evidenced in the DOH’s requests of over $1 million for unbudgeted renovations for the Trotter Building, $200,000 for a double budgeted fence project at the Juvenile Sex Offender facility, over $1.5 million for unbudgeted expansion in multi-systemic therapy (MST) programs, $100,000 in standby pay and purchasing of new cars for MST staff, and $400,000 worth of new, non-Felix related furniture for Guidance Centers.

In spite of these serious misgivings, your Committee remains committed to special needs children and in complying with the consent decree. Funds to increase the Child and Adolescent Mental Health Division’s base budget have been provided even though there is a decreasing population being served by the DOH due to the transfer of "low end" Felix children to the DOE. This will provide three times more resources per Felix child as in FY 2001. In total your Committee has allocated $60 million for DOH Felix costs over the fiscal biennium.

Though not a party to the Felix Consent Decree, the Department of Human Services (DHS) is responsible for a Felix-related item to recruit, license, train, and counsel foster or adoptive families. Funds have been provided to hire eight multi-agency case coordinators and 21 case support aides. The total appropriation for this component of the state's Felix response is $1.7 million for each year of the fiscal biennium.

In total, $166.3 million in additional resources has been allocated over the fiscal biennium to be applied specifically to Felix-related initiatives in the DOE, DOH, and DHS, with the expectation that the respective departments will wisely use the funds to achieve compliance by December 2001. The total budget is the sum of $355.6 million and $360.8 million, a grand total of $716.8 million.

Consistent with the requirements of the Makin Settlement, an appropriation of $8,540,904 for FY 2002 and $8,531,104 in FY 2003 has been provided. This is in addition to the $4,207,060 in each year of the current budget. The resources appropriated in this biennium will allow the DOH to reduce the number of individuals on the waitlist for home and community-based waiver services for persons with developmental disabilities or mental retardation. In addition, your Committee has provided DOH the means to build the infrastructure necessary to provide home and community-based services by reallocating existing positions.

The Department of Justice found the State of Hawaii, namely the Hawaii State Hospital, in violation of the Civil Rights of Institutionalized Persons Act (CRIPA). As part of the settlement agreement between the Department of Justice and the State of Hawaii, Hawaii State Hospital must provide a needs assessment and an omnibus plan for mental health services for developmentally disabled or mentally retarded individuals diverted or discharged from the Hawaii State Hospital.

Pending the completion of the court-ordered omnibus plan from the Adult Mental Health Division, an additional $8.1 million has been earmarked in each year of the fiscal biennium for a comprehensive array of services that are community-based for individuals discharged or diverted from the Hawaii State Hospital. The total appropriation for adult mental health services is $72.9 million for each year of FY 2002 and FY 2003.

Further hampering your Committee’s ability to affect policy through funding are the alarming number of emergency funding requests that have been submitted by the Governor to cover the costs of certain programs for this current fiscal year. The amount of all the emergency funding requests originally submitted this year totaled over $115 million. At present, the departments are estimating emergency appropriation requirements to be approximately $92 million. The adjustments were primarily due to the Department of Health’s Child and Adolescent Health Division emergency request for Felix adjustment from $56.8 to $44.6 million and the Department of Education’s emergency request for Felix adjustment from $43.3 million to $33.4 million. These emergency funding requests, at the least, suggests poor fiscal planning and at the worst, suggests that the departments are openly defying the fiscal parameters set by the Legislature.

Though no funds have been allocated to pay for collective bargaining costs at this time, your Committee is cognizant of the current situation and is keeping a watchful eye on all the negotiations between the State and the various unions. For fiscal planning purposes, your Committee has decided to wait until all the negotiations have been completed before committing to pay any collective bargaining agreement costs. Recognizing that funding the collective bargaining agreements will further strain the State budget, your Committee nevertheless is prepared to factor in reasonable collective bargaining costs.

The numbers bear out that the smaller State departments represent a very small percentage of the State’s total general fund operating budget. The total general fund budget for the twelve smallest general funded programs total $144.8 million for FY 2002 and $142.2 million for FY 2003. The average budget adjustment in funding for FY 2002 for the 12 smallest general funded departments in this budget is -$28,730 in FY 2002 and -$212,583 in FY 2003. These programs are dwarfed by a $172.2 million increase in FY 2002 and an additional $54 million increase for FY 2003 for the Department of Education. Another large increase is found in the Department of Budget and Finance, with growth of $72.6 million in FY 2002 and an additional $58.1 million in FY 2003. The Department of Health is increasing by $17.4 million in FY 2002 and an additional $14.7 million in FY 2003. The Department of Human Services is increasing by $26.8 million and $2.1 million in FY 2002 and 2003 respectively. There is a $15 million increase in funding in FY 2002 for the Department of Public Safety, and the University of Hawaii increases by $40 million and $18 million in FY 2002 and 2003, respectively.

Constrained in part by the major policy issues described above, your Committee reviewed funding decisions made in previous years to review the effectiveness of those decisions and the feasibility of continuing those decisions to balance the budget.

A number of cost-cutting strategies used in the past include consolidating programs, implementing management efficiencies, deferring expenses through techniques such as payroll "lag," and diverting excess special fund balances into the general fund. Stopgap measures such as hiring freezes, debt refinancing, and changing the assumptions by which funding of the ERS are calculated are other techniques that were used.

During the early 1990's, Hawaii's slumping economy had detrimental effects on our entire community. In this period the Legislature made painful budget cuts to many state departments.

In developing this budget, your Committee also revisited the use of vacancy reductions (attrition) as a means of reducing costs. As evidenced by Table 1 below this approach has been used in the past to address budget shortfalls. The concept appears simple enough: as employees voluntarily or involuntarily separate from services their positions would be abolished, the salaries associated with the position would be saved, and the job responsibilities would be reassigned to remaining personnel. Your Committee has learned that the Department of Human Resources Development calculated the average number of employee separations per year for the past three years at 1,640. The average annual payroll for these employees has been $49 million, of which $31.6 million is from general funds and $17.4 million is from non-general funds.

Upon further inspection it became evident that the department with the highest number of separations is the Department of Education. Furthermore, the positions experiencing the highest rates of separation are educational assistants, school custodians, social workers, cafeteria helpers, janitors, registered professional nurses, school health aides, and school cooks and bakers. Without thoughtful analysis of the impacts of not filling these positions, it would be irresponsible to impose an attrition policy.

The Table below shows how the Legislature prioritized falling general fund revenues in light of increasing demands for public services for the period from FY 1994 to the current fiscal year, FY 2001. During this period the DOE and the Department of Public Safety (PSD) were spared from fiscal cuts and in fact had their resource allocations grow considerably, while all other State agencies cut positions and resources for personnel expenses. DOE and PSD combined for an increase of 2,662 positions over the eight-year period during which time general funded positions increased by a total of 394 positions. That meant that the Legislature had to cut from State government 2,268 positions to provide for these priority areas. In addition, over this eight-year period general fund expenditures for DOE and PSD personnel increased by $273.5 million, while total general fund expenditures for personnel costs grew by only $204.4 million. Despite collective bargaining adjustments over the eight years, the average personnel cost adjustment for the remaining nineteen agencies and departments is a negative $3.64 million.

Table 1. Changes in General Fund Position Counts and

Personnel Costs from FY 1994 to FY 2001.

The Hawaii Health Systems Corporation was created to help the community hospitals become self-sufficient entities within the State government. However, your Committee remains concerned about the fiscal operations of the Hawaii Health Systems Corporation. In each year since the passage of Act 262, Session Laws of Hawaii (SLH) 1996, the Corporation has requested large general fund subsidies. The intent of Act 262 was to enable the Corporation to become more self-sufficient and remove the Corporation from the State's budgeting requirements and processes. Without this budget oversight, it has proved difficult for your Committee to assess the true needs of the Corporation and provide requisite funding. Patient revenue and cash collections increased by $13 million and $30 million respectively for FY 1999 and FY 2000. At this juncture, your Committee is requesting the Corporation to continue to reallocate current funds in efforts towards achieving the goal of self-sufficiency.

Developing a sound budget also means looking at ways to stimulate the economy to increase overall state revenues.

In 1997, a key measure to stimulate the economy aimed at improving conditions for small businesses. A recommendation of the Tax Review Commission, Act 353, SLH 1997, mitigated the pyramiding aspect of subleasing real property by reducing the general excise tax (GET) rate by 0.5% per year. By 2004, all subleases will be subject to a 0.5% GET rate. In addition, in 1999, the Legislature enacted Act 71 that further assisted businesses by reducing the pyramiding effect on intermediary services over a seven-year period, again, by reducing the rate by 0.5% per year. These two measures will save businesses over $120 million by FY 2002; and over $220 million by FY 2003. The savings to businesses is expected to top $500 million by FY 2005.

Another key step to stimulating the economy was the enactment of Act 157, SLH 1998, which provided the largest personal income tax cut in state history. The net effect of lowering and restructuring the State's personal income tax rates was to put millions of dollars back into the hands of residents and businesses. This current year represents the third year of the income tax reduction - a reduction that will put over $660 million back into the pockets of Hawaii's residents by FY 2002; and just under $1 billion by FY 2003.

The compounding effects of these cuts to personal income and the GET will become more pronounced over the next few years. The turnaround is already evident. The chief economist for the Bank of Hawaii stated before your Committee that "Hawaii's aggregate income – personal income or gross state product – achieved a real, or inflation adjusted growth rate in the neighborhood of 3 percent during 2000. This is the highest growth rate since economic momentum in Hawaii began building in 1997."

With these tax cuts in place to help stimulate the economy, your Committee decided to focus its tax strategies to directly help the people most in need. Through separate measures, your Committee has provided for an earned income tax credit, a graduated food tax credit, and an increase in the standard deduction on the income tax. These tax relief measures will provide additional discretionary income for the working poor.

With the assistance of the subject matter committees, your Committee has given careful and close scrutiny to existing State programs, the administration’s proposals, and the House initiatives.

As outlined earlier, even though your Committee had to set aside 40% to 41% percent of the budget to pay for fixed costs and court mandated programs in the DOE and DOH and focused its tax efforts at helping the working poor, your Committee still managed to provide funds for the following priority items of the House:

• Public education for the children of Hawaii;
• Higher education;
• Public health;
• Human services – care services for the our elderly, medical services and pharmaceuticals for the elderly and disabled, and public housing;
• Substance abuse treatment to help our families and neighbors who sincerely want to improve their lives;
• Public safety for our neighborhoods and protections against natural disasters;
• Preserving and protecting our environment; and
• High technology in the private and public sectors.

• 201 additional teachers to account for mainstreaming of special education students.
• 26 vice principals for the schools with highest special education populations, principals and administrative assistants for new schools, 42 business support assistants, and 200 clerks to handle the paperwork and business aspects of running our schools to allow educators to do what they do best – educate. This is a top priority of the Board of Education.
• $3 million over two years is appropriated for the Hawaii Leadership Academy to train the next generation of educational leaders.

• Better learning facilities for our students through $2.1 million for repairs and maintenance, $1.3 million for additional custodians, kitchen staff, and equipment, and $1.8 million for electricity due to rising costs and increased usage.

• Nearly $2.8 million over the biennium for more security attendants at campuses and criminal history record checks for prospective school employees.

• $5.6 million in textbooks and classroom equipment for new facilities, and an additional $4.5 million in H.B. No. 180 to purchase textbooks.
• In H.B. No. 179, $27 million in emergency funds for new computers and infrastructure to lower ratio from 6 students per computer to 4 students.

• Full implementation of Hawaii Content and Performance Standards - $5 million in both years of the biennium.

• $800,000 for each year to move closer to equality in funding and opportunities for female athletes.

• $5.6 million for a new human resource system and a new student information system will be used to support more efficiency in the DOE administration.

• $63 million over two years to recruit and train needed professionals, establish year-round student support services, implement integrated special education database system, initiate school-based mental health services, and address compliance issues of rural areas.

• $100 million in capital improvement funds for repairs and upgrades of existing school facilities statewide.
• $22 million in capital improvement funds for new school facilities in Kapolei and Mililani.
• $4 million in capital improvement funds for school playground improvements statewide.

Your Committee has appropriated approximately $1 million for the continued academic excellence of the John A. Burns School of Medicine. In recognition of the facilities needs of our prestigious medical school, additional capital improvement funds in the amount of $150 million was appropriated for the construction of the new School of Medicine school and Cancer Research Center.

Due to recent discussions regarding the future of the Mauna Kea summit, your Committee is also allocating $1 million for the mandate to implement the Mauna Kea Master Plan.

Due to the unique autonomy relationship of the University to the state government, additional allocations and resource movements were handled without the fiscal oversight of your Committee.

In ten years, 20 percent of Hawaii’s population will require long-term care. Over $1.9 million has been provided over the biennium for Kupuna Care services, for elderly abuse services, and to fund a study on long-term care in Hawaii.

To provide for the health needs of the Hawaii's rural communities, your Committee has appropriated $2 million and $16 million for the Hawaii Health Systems Corporation in FY 2002 and 2003, respectively. HHSC manages the state system of twelve community hospitals, divided in five regions – West Hawaii, East Hawaii, Maui, Oahu, and Kauai. In addition, $12,511,000 in capital improvement funds are also appropriated for various improvements and upgrades at the hospitals.

The Department of Health has created the Healthy Hawaii Initiative to increase years of healthy life for all and reduce existing health disparities among ethnic groups in Hawaii by developing chronic disease prevention programs, nutrition educational programs and services to promote physical activities for better health. Funds for this initiative are derived from a portion of the 25% allocation to the DOH from the Tobacco Master Settlement Agreement, whose $71.1 million in FY 2002 and $50.1 million in FY 2003 will be distributed into the Rainy Day fund, Tobacco Trust fund, Department of Health and the Department of Human Services accounts.

Improvements in medical technology have produced more effective yet costly pharmaceuticals for which generic substitutes are not available. Providing access to prescription drugs prevents the further progression of illnesses, reduces emergency medical costs, and costly long-term care services. In recognition of the savings inherent in the proactive measures taken by the department to increase access to prescription drugs, your Committee has provided $24.6 million in general funds and $55.2 million in all means of funding over the 2001-2003 fiscal biennium.

To provide housing for low-income families and individuals, your Committee authorized the expenditure of $53.5 million in federal funds over two years to provide rent subsidies to those in need. These monies are in addition to $3 million in federal funds over two years for a drug elimination program and self-sufficiency programs. In general fund expenditures your Committee has also allocated $2.5 million over two years for the maintenance of an existing IHS emergency shelter, funding for homeless shelters at Kalaeloa and for programs aimed at transitioning out of and preventing homelessness. A companion capital improvement appropriation of $420,000 will renovate two barracks for use as shelters.

Your Committee has allocated an additional $10 million appropriation to match a federal Hope VI Grant to provide a total of $45 million for the construction of new buildings at the site of Kuhio Park Terrace.

To defer the expenses of long term care, $2.2 million in general funds and $33.4 million in all means of funding over the biennium has been provided to support Nursing Home Without Walls and the Residential Alternative Community Care programs.

Your Committee is approaching this serious problem by providing $10.4 million over the biennium for a robust substance abuse treatment system in which individuals have access to treatment in the pre-trial, trial, sentencing, and incarceration stages of the judicial process.

Assessment, referral and treatment programs will be carried out by a partnership of the Judiciary, Department of Public Safety, Department of Human Services, and Department of Health. Within this system, treatments will be provided by Department of Health, with referrals to treatment stemming from the applicable agencies with jurisdiction over a particular individual. In particular, Public Safety will divert pre-trial, parole, and incarcerated individuals to treatment. The Judiciary will be able to refer individuals to treatment during sentencing through an expansion of Drug Courts.

Total allocations for the partnership will provide $4.8 million in FY 2002 and $5.6 million in FY 2003 for substance abuse programs for the criminal justice population.

To assist the departments in addressing the needs of the criminal justice population, your Committee has appropriated resources for social workers in Public Safety to assess and refer pretrial inmates to substance abuse programs, increasing the total available resources to $700,000 over the biennium. Secondly, $4.8 million in the Judiciary's budget is appropriated to expand the drug courts and probation offices on the neighbor islands. In addition, over $500,000 in the biennium for residential treatment beds have been provided by your Committee for incarcerated young adults under the care of the Department of Human Services. And finally, over $4.4 million is provided in the biennium for treatment programs and an integrated case management system in the Department of Health.

The base allocation for this coordinated effort to address substance abuse is $29.6 million. The total budget for the biennium is $40.2 million.

Though certainly a compromise situation, approximately 1200 inmates are held out-of-state due to Hawaii prison bed shortages. Your Committee is allocating $4.4 million in each year of the biennium to renew the out-of-state contract. In addition, $3.2 million is appropriated to lease 100 federal jail beds for pre-trial inmates to alleviate current overcrowding in our prisons.

In the event of a natural disaster, your Committee is committed to full preparedness, and hence is providing $300,000 over the biennium to improve our state civil defense system.

Your Committee recognizes the responsibility, shared by all residents of Hawaii, to care for the ecosystem in which we live. To this end, your Committee has provided resources for several key items:

In addition to the items listed above, $1.2 million is appropriated for a study on the carrying capacity of Hawaii for tourism. Through this study, your Committee hopes to better understand how it impacts our environment and to ensure sustainable economic growth that enhances our quality of life rather than detract from it.

In total, your Committee has allocated $102.1 million for the preservation and protection of our precious environment. In addition, $8.3 million in capital improvement funds is appropriated to improve and upgrade state parks.

Your Committee has embarked on a course to promote Hawaii as a seedbed of new technology development. A total of $4 million over two years has been allocated to provide startup capital to incubator tenants at the Manoa Innovation Center and the Maui Research Technology Center. An additional $200,000 in each year has been provided by your Committee to promote Hawaii as a place favorable for high tech enterprises in areas such as biotechnologies, information technologies, health and medical services, and earth, ocean and space sciences.

In the public sector, your Committee has allocated funds to upgrade internal information technology systems for improved efficiency. In order to increase government efficiency, the Governor submitted a series of requests to appropriate funds for information technology. The initial requests were made by various state agencies, centralized through the governor's office, and now decentralized by your Committee for improved analysis. Subsequent to information-gathering, your Committee appropriated approximately $12 million for the biennium towards the governor's information technology initiatives.

Your Committee has provided a biennium-operating budget of $7.125 billion and $7.311 billion for FY 2002 and 2003.

Your Committee has provided general fund appropriations of $3.453 billion for FY 2002 and $3.597 billion for FY 2003. This general fund level for FY 2002 represents a $107.6 million (23.8%) reduction from the increase requested by the administration. The general fund appropriation for FY 2003 represents $134.7 million (21.3%) less than the level requested by the administration.

Your Committee has provided a non-general fund appropriations of $3.672 billion for FY 2002 and $3.714 billion for FY 2003. The non-general fund level requested for fiscal year 2002 is $3.821 billion and $3.905 billion in fiscal year 2003. The level provided in this budget for non-general funds level for FY 2002 represents a $148.1 million (26.6%) reduction and for FY 2003 a $191.3 million reduction from the level requested by the Governor. Growth in non-general funds is due largely are due to several large ceiling increases.

Table 2. Summary of Non-General Fund Increases

For special funds the Department of Health requires a ceiling increase in FY 2002 to $71.3 million and a FY 2003 increase of $50.3 million for Health Resources Administration (HTH595) to account for the receipt of Tobacco Settlement funds and disbursement of the funds to the "rainy-day" fund, the tobacco settlement trust fund, Department of Human Services for S-CHIP, and for health promotion and disease prevention programs.

The State Housing Programs are expecting the receipt of additional federal funds of $29.4 million per fiscal year for improvements to public housing facilities. The Department of Human Services is expecting an increase of $88.2 million and $86.0 million due to an adjustment of the State's rate of reimbursement or federal matching assistance percentage. The Department of Labor workforce development programs are anticipating an additional $10.4 million for Workforce Development programs.

Trust fund ceiling increases of $23 million for FY 2002 and $21 million for FY 2003 are attributable to increased health fund requirements for the Health and Life Insurance Benefits (BUF 141) program. As health insurance premiums increase the trust fund ceiling must likewise increase to allow for payment of the employer and employee portions of health insurance premiums.

Interdepartmental transfer funds (U-fund) budgeted within the Department of Budget and Finance (B&F) have increased as the Department of Education's (DOE) and the University of Hawaii's (UH) requirements for debt service, health fund, and employees retirement system costs have increased. The ceiling increase for U-funds is needed to allow Budget and Finance to expend general fund monies budgeted in the DOE and UH and transferred to the Department of Budget and Finance. This is actually a double budgeting for housekeeping purposes and should not be viewed as an added expense.

The Department of Health's Environmental Management (HTH 849) requires a revolving fund ceiling increase of $49.1 million per year to disburse federal funds received for Safe Drinking Water Act and Clean Water Act projects implemented at the county level.

Capital improvement funds authorized in this bill consist of $626.0 million for FY 2002 and $512.3 million for FY 2003. Of these sums, $247.1 million in FY 2002 and $176.2 million for FY 2003 would be financed through the issuance of general obligation bonds. This represents a $108,738,000 reduction for FY 2002 and a $348,978,000 reduction for FY 2003. The majority of construction funding has been devoted to the improvement of public school facilities and the University, with $239 million (54%) to ensure adequate facilities for education.

Given the fiscal limitations, your Committee on Finance believes it has allocated available resources to those areas of highest priority. This budget meets the state's financial obligations and social responsibilities and as required by the Constitution is balanced. We realize there is still much work to be done and your Committee stands ready to cooperate with the Senate to produce a fair and equitable biennium 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. 200, as amended herein, and recommends that it pass Second Reading in the form attached hereto as H.B. No. 200, H.D. 1, and be placed on the calendar for Third Reading.