Honorable Calvin K.Y. Say

Speaker, House of Representatives

Twenty-Second State Legislature

Regular Session of 2003

State of Hawaii

Honorable Robert Bunda

President of the Senate

Twenty-Second State Legislature

Regular Session of 2003

State of Hawaii

Sir:

Your Committee on Conference on the disagreeing vote of the House of Representatives to the amendments proposed by the Senate in H.B. No. 200, H.D. 1, S.D. 1, entitled:

having met, and after full and free discussion, has agreed to recommend and does recommend to the respective Houses the final passage of this bill in an amended form.

The purpose of this bill is to fund the Executive branch's operating and capital improvement expenditures for the fiscal biennium July 1, 2003 through June 30, 2005.

The Legislature has never faced the level of fiscal uncertainty that it has this session. Declining projected revenues, coupled with increasing fiscal needs, have greatly impacted the manner in which your Conference Committee constructed this Biennial Budget. Your Conference Committee had to choose among valid competing needs and has set forth, herein, its budgetary priorities.

According to the National Conference on State Legislatures' "State Budget Update: November 2002" report:

• Thirty-one states reported budget gaps in the early months of fiscal year 2002-2003. Some states have already taken action to close them. Seventeen states report no gap or indicate that it is too early to specify the size of a potential budget gap, and two states did not provide information.

• The current cumulative budget gap for all states is approximately $17.5 billion for fiscal year 2002-2003 (3.6 percent of original fiscal year 2002-2003 appropriations). This amount has grown since the fiscal year began. When developing their fiscal year 2002-2003 budgets, states faced an aggregate gap of $49.1 billion.

• State revenue collections continue to be anemic. Thirty-three states report that revenue collections are below forecasted levels through October.

• Twenty-nine states revised their revenue estimates for fiscal year 2002-2003. The revenue forecast was lowered in 26 states.

• The revenue outlook for the remainder of the fiscal year does not reflect confidence for a strong national recovery. Twenty-nine states are concerned about revenue performance, and nine are pessimistic. Eight states report a stable outlook, and two are optimistic.

Twenty-nine states report that spending is exceeding budgeted levels. Twenty-four states report that Medicaid or health care programs are over budget.

The visitor industry plays a large role in the health of Hawaii's economy. Consequently, the State's growth is strongly correlated to the rate of economic expansion in U.S. and international visitor markets. Consensus projections of U.S. economic performance continue to indicate a weak economy. The Blue Chip Economic Forecast, based on an average of fifty major U.S. forecasts, adjusted the forecast for growth in real U.S. gross domestic product in 2003 downward in February 2003 to 2.7 percent.

In 2003, total visitor arrivals were predicted to grow 5.3 percent with visitor expenditures forecast to increase 6.8 percent. Positive growth in visitor arrivals was expected to come from a strong recovery of tourism from Japan together with growth from mainland areas. Visitor arrivals were projected to regain their 2000 levels in 2004, with an additional 4.2 percent increase over 2003, and subsequently return to its historical growth level in the 2 percent range. However, preliminary department of business, economic development, and tourism passenger counts for March 2003 versus March 2002 show a 1.3 percent decline in domestic arrivals and a 12.3 percent decline in international arrivals.

In addition, the recent outbreak of Severe Acute Respiratory Syndrome (SARS) threatens to reduce Hawaii's much needed visitor counts. Cases of the respiratory illness have been reported primarily in Asia. More than 3,800 cases of SARS and more than 200 deaths have been reported in 26 countries, with a vast majority of cases and deaths in mainland China and Hong Kong. Visitors from both East and West may be less inclined to travel aboard an airliner, as the chances for contracting the disease increase in such a close-quarters environment. Since the SARS outbreak appears to be in its infancy, its long-term economic effects on Hawaii are unknown.

It is clear that these negative factors will continue to affect Hawaii's economy--an economy that is still recovering from the effects of the national recession that began in early 2001. Your Conference Committee believes that Hawaii will continue to experience a decline in revenues, in the short-term. As such, the reductions made throughout the budget were necessary to provide for the most critical of services.

Last year, many states used rainy day funds and other measures to address the $49.1 billion shortfall. States raised taxes by $9.1 billion in the aggregate, breaking a trend of annual tax cuts that began in 1994. Only Hawaii cut taxes by more than one percent while eighteen states raised taxes more than one percent.

For the current fiscal year ending June 30, states must address a collective $17.5 billion budget gap. The list of states with expected deficits is long. Hawaii's budget deficit stood at approximately $165 million. Hawaii was one of only two states optimistic about revenue performance.

State legislatures around the country are currently experiencing similar problems. Declining revenues and growing demands will necessitate intense scrutiny of state budgets. Other states are dealing with their shortfalls in ways comparable to the choices made by your Conference Committee. For example, thirty-one states are imposing budget cuts, twenty-eight states are tapping various state funds, fourteen states are tapping rainy day funds, and twenty-one states are using tobacco settlement funds.

Revenue collections have been lethargic during the first four months of the fiscal year, and overruns, particularly in Medicaid programs, are already being reported in at least twenty-four states. Massachusetts will cut 50,000 people from its Medicaid rolls and still faces a $300 million dollar gap in the program. Georgia reports a $417 million shortfall in Medicaid. Consequently, states may be looking at raising the standards for Medicaid eligibility.

At its January 7, 2003 meeting, the Council on Revenues forecasted a growth rate of 6.1 percent for fiscal year 2002-2003. This estimate did not take into account the geopolitical uncertainty the nation faced at the time, namely, the impending war with Iraq.

During its March 13, 2003 meeting, the Council revised its estimated growth rate of 6.1 percent down to 4.3 percent. The Council stated that this downward revision was due almost entirely to tax credits claimed in 2001. According to the Council, the credits that may have the greatest unanticipated impact were high technology investment, research activities, and residential and remodeling tax credits. This 1.8 percent drop in estimated revenues for the current fiscal year amounted to a loss of approximately $56 million.

A key component of balancing the prior administration's six-year financial plan was the transfer of $175 million from the Hawaii Hurricane Relief Fund (HHRF) to the general fund. The new administration's approach to balancing the budget did not call for the transfer of any monies from the HHRF, reductions in force, or any tax increases. Instead, the new administration pursued alternatives such as a 5 percent reduction to "discretionary" general fund expenditures, transferring balances from various non-general funds, imposing a statewide hiring freeze, as well as making reductions to previously submitted budget requests for additional funding to balance the budget. The process of working through these alternatives took a great deal of time for both the new administration and the Legislature.

As a result of the March 13, 2003 Council on Revenues meeting and its revised forecast, the new administration suggested that the Legislature plan for the projected decline in revenues by taking the following actions:

• Shift excess special funds to the general fund, providing an estimated $24 million;
• Restructure existing debt and revise the interest rate assumption on future bond issuances, providing an estimated $50.8 million;
• Revisit Act 221, Session Laws of Hawaii 2001, and make adjustments, providing an estimated $55.5 million;
• Reduce the Department of Education's "Adult Education" program, providing an estimated $2.7 million; and
• Supplanting $8 million in general funds for the Department of Education with $8 million in federal funds.

As previously mentioned, twenty-eight states have tapped various state special funds to meet budget shortfalls. Given the current fiscal crisis, your Conference Committee has also examined these funds as possible sources of revenue. While the new administration proposed to transfer $41 million, your Conference Committee has identified more than $75 million in non-general fund cash balances to be transferred to the general fund through HB 1152, relating to state funds. With the magnitude of fund transfers your Conference Committee proposes, fund administrators will need to closely monitor revenues and expenditures. While your Conference Committee finds no pleasure in taking this course of action, it believes it is necessary in order to ensure that priority programs in departments such as Education, Health, Human Services, and the University of Hawaii are, and will continue to be, funded at a level deserving of their core missions.

As a result of the growing needs reflected in the budget, your Conference Committee recognizes increases of approximately $56 million in fiscal year 2003-2004 and $161 million in fiscal year 2004-2005 in non-discretionary costs.

Your Conference Committee notes that among the non-discretionary additions contained in the budget, over $20 million in fiscal year 2003-2004 and over $50 million in fiscal year 2004-2005 is required for health premiums for active and retired state employees. In addition, over $12 million in fiscal year 2003-2004 and over $17 million in fiscal year 2004-2005 is required for the employer's portion of Social Security and Medicare contributions.

Your Conference Committee also feels it is important to note that due to the condition of the stock market, the Employees' Retirement System has realized negative returns on the market value of retirement assets of 6.9 percent in fiscal year 2000-2001 and 5.9 percent in fiscal year 2001-2002. These negative market conditions resulted in increases of over $24 million in fiscal year 2003-2004 and over $94 million in fiscal year 2004-2005 in the State's obligation for funding the Employees' Retirement System.

With fiscal prudence in mind, your Conference Committee chose to reduce the amount of new capital improvement projects initiated. Conversely, the related bond issuance was kept at $450 million in fiscal year 2003-2004 but reduced from $450 to $400 million in fiscal year 2004-2005. In addition, bond interest rate assumptions were reduced from 6 percent to 5.5 percent in fiscal year 2003-2004 and from 6 percent to 5.7 percent in fiscal year 2004-2005. As a result, related interest and bond costs were reduced by $787,000 in fiscal year 2003-2004 and $712,000 in fiscal year 2004-2005 respectively.

Without the use of some of the Hawaii Hurricane Relief Fund balance, increases in taxes, or reductions in force to assist in balancing the budget, the new administration found it necessary to propose a five percent reduction to the discretionary general fund budgets of the majority of departments. Some of these proposed reductions were accepted by the Legislature, while other reductions were introduced.

The overall global economy has provided at least one positive scenario which helps to alleviate the state's budget shortfall. Lower interest rates have allowed the State to realize savings in debt service costs. Due to previous general obligation bond restructuring and refinancing transactions, the State is projected to have a net savings of $55.2 million in fiscal year 2003-2004 and $24.8 million in fiscal year 2004-2005. Furthermore, the new administration is proposing another restructuring and refinancing transaction that would provide additional estimated savings of $24.9 million in fiscal year 2003-2004 and $23.4 million in fiscal year 2004-2005. These two transactions have the potential to save the State $80.1 million in fiscal year 2003-2004 and $48.3 million in fiscal year 2004-2005.

Your Conference Committee had a difficult time working within the framework established by the new administration. Given this limitation, your Conference Committee carefully examined positions identified as vacant since at least December 31, 2001. Although the departments may want to maintain these positions, they have adjusted to the vacancies. Workloads have been redistributed and savings have been realized. In these uncertain economic times, lower budget allocations will not permit departments to fill these vacancies. It is your Conference Committee's hope that, when Hawaii's economy recovers, these vacancies may be restored.

In addition to reducing positions and funds in various departments, your Conference Committee also looked at programs where position count reductions were not warranted. In these instances, a fifty percent reduction to the salary amount for positions that had been vacant since at least December 31, 2001, was assessed but no positions were taken.

Your Conference Committee believes that the new administration will continue to keep a watchful eye on personnel expenditures in order to realize the efficiency savings needed to contend with these reductions of vacancies. The Legislature recommends that the new administration carefully review position vacancies and recommend the elimination of unneeded positions accordingly, in the coming supplemental budget for fiscal year 2004-2005.

Your Conference Committee understands that the new administration is seeking ways to improve efficiency in state government. As such, your Conference Committee has identified two key areas, travel and overtime, for reductions, with the expectation that the new administration will find further reductions using similar approaches.

Your Conference Committee has reduced the amount of travel budgeted in state government by ten percent for the Department of Education and the University of Hawaii, and thirty percent for all other departments. Your Conference Committee realizes that because Hawaii is an island state, travel is very important, but expects that it can be reduced with minimal impact to services provided by state government.

To help preserve services, your Conference Committee hopes that, through the actual execution of these reductions, the departments will take special care to ensure that these reductions will least affect those counties where travel is critically important.

Your Conference Committee reduced overtime by $685,527 in fiscal year 2003-2004 and $1,582,344 in fiscal year 2004-2005 in five program areas: the Halawa Correctional Facility, the Hawaii Community Correctional Center, the Maui Community Correctional Center, the Oahu Community Correctional Center, and the Women's Community Correctional Center. Your Conference Committee notes that significant overtime costs were cited in the Office of the Auditor's Financial Audit of the Department of Public Safety, Report No. 02-10, May 2002. As a result of this report, your Conference Committee identified these amounts as reductions, in an attempt to bring these facilities' overtime expenditures closer to levels found in other areas of the country.

In consideration of the State's current fiscally constrained situation, your Conference Committee has generally adopted the new administration's proposed budget for Fiscal Biennium 2003-2005 for the Department of Education (DOE) and the Hawaii State Public Library System (HSPLS). Your Conference Committee, in accepting most of the new administration's recommendations, has not abdicated the Legislature's responsibility to scrutinize and carefully evaluate these departments' budgetary requests. In acknowledging the Council on Revenues' amended and reduced state revenue projections, your Conference Committee has made additional, very specific, budget reductions. These reductions will not adversely impact the departments' ability to meek its mandated responsibilities or stated missions.

Your Conference Committee has approved the DOE's request to internally reallocate resources, both within and between major program areas, to address specific departmental needs. Your Conference Committee has agreed to the new administration's requests to transfer funds from various programs and other cost categories to address department salary shortfalls within Regular Education (EDN 100) and Comprehensive School Support Services (EDN 150). Your Conference Committee would like to specifically acknowledge the special and federal fund surplus in the department's Food Services program (EDN 400/MD), which will be used to supplant a portion of the Food Services program general fund appropriation. Due to this special and federal fund surplus, your Conference Committee has concomitantly approved the reduction of approximately $9.2 million for fiscal year 2003-2004 and $10.6 million in fiscal year 2004-2005 in general funds for the Food Services program. These general fund reductions will be transferred to Regular Education (EDN 100) and includes $2.4 million in fiscal year 2003-2004 and $2.3 million in fiscal year 2004-2005 for textbooks, equipment, and supplies; $1.2 million in fiscal year 2004-2005 for workers' compensation costs; and $1 million in fiscal year 2003-2004 and $2.4 million in fiscal year 2004-2005 for charter school funding. Approximately $5.9 million in fiscal year 2003-2004 and fiscal year 2004-2005 will be transferred to Comprehensive School Support Services (EDN 150) to offset a projected salary shortfall.

Your Conference Committee has also approved the administration's request to transfer various resources from the Department of Health (DOH) to DOE, which would supplement the DOE's Special Education and Felix Consent Decree services. The DOE's EDN 150 budget has also been increased with the addition of (24) temporary positions and (28.50) permanent positions and $11.9 million in general funds for fiscal year 2003-2004 and fiscal year 2004-2005, which will be transferred from DOH to DOE's Services for Children with Autism, a mandated Felix Response Plan program. Your Conference Committee has also approved the transfer of $14.6 million in both fiscal year 2003-2004 and fiscal year 2004-2005 to DOE's Services for The Children with Autism program, primarily to fund contract services.

In addition, your Conference Committee has approved the conversion of eight hundred and three (803) temporary Comprehensive School Support Services (EDN 150) positions, which are primarily Felix Response Plan (FRP) and School Based Behavioral Health (SBBH) positions, to permanent status. Although your Conference Committee has not stipulated the specific positions to be converted, your Committee encourages the DOE to seriously consider converting specialized technical and school-level positions (e.g., school based behavioral specialists, special and regular education teachers, therapists, high risk counselors, speech pathologists, etc.) before the conversion of administrative, state or district level positions. In the 2002 Supplemental Appropriations Act, the Legislature requested that the DOE complete a comprehensive needs assessment of the Felix Response Plan (FRP) and School-Based Behavioral Health (SBBH) programs in order to identify those program needs, e.g., permanent positions, other resources, etc., which are critical to compliance and maintenance of compliance under the Felix Consent Decree and other related federal Special Education statutes. The DOE is continuing to work on the requested program needs assessment and has also provided some of the requested information to your Conference Committee. Your Conference Committee has approved a proviso which, among other requirements, requests the DOE to continue its ongoing needs assessment and report to the Legislature prior to the convening of the 2004 and 2005 legislative sessions in order to allow the Legislature to complete its determination of the appropriate number of temporary positions to convert to permanent status in the future.

Your Conference Committee has adopted the administration's proposed five percent discretionary general fund reduction for the department of education. Your Committee has approved the reduction of approximately $3 million in general funds for fiscal year 2003-2004 and fiscal year 2004-2005: approximately $2.7 million per year for Regular Education (EDN 100); approximately $94,000 per year for School Instructional Support (EDN 200); approximately $144,000 per year for State and District Administration (EDN 300); and approximately $38,000 per year for School Community Service (EDN 500).

Your Conference Committee has provided lump-sum additions to the EDN 100 budget that include: approximately $2.5 million and $2.9 million in fiscal year 2003-2004 and fiscal year 2004-2005, respectively, for New Century Charter Schools; approximately $2 million in fiscal year 2003-2004 and fiscal year 2004-2005 for the School Safety Manager program; and approximately $405,000 in fiscal year 2003-2004 for lease rent for Nanaikapono School. New Century Charter School funding remains a statutorily mandated obligation for the State, and the approved lump-sum adjustment would address a portion of this required cost. The New Century Charter School program has been historically under-funded. Act 177, Session Laws of Hawaii 2002, the Supplemental Appropriations Budget for fiscal year 2002-2003 provided approximately $6 million in charter school funding. This resulted in a $5.5 million shortfall for the program in fiscal year 2002-2003. Currently, there is only $6 million in the DOE's base budget for charter schools. Therefore, without increased funding, the State's charter schools, which are defined as State public schools, may again face deficits in fiscal year 2003-2004 and fiscal year 2004-2005. To further insure the solvency of the charter school program your Conference Committee has included a budget proviso that clarifies, for the DOE, that any funds allocable to the charter schools shall be determined by statute and, therefore any reduction to the statutorily determined amount must be explicitly stated in and justified under current Hawaii charter school law.

Your Conference Committee has also determined that the lump-sum adjustment for rental payment for Nanaikapono School also qualifies as a fixed and mandated cost for the State. Additionally, your Conference Committee believes that school safety remains a major priority for the department and therefore, the school safety manager program should continue to receive the approved lump sum funding.

Your Conference Committee has evaluated two administration requests to reduce the base general fund budgets for Regular Education (EDN 100) and the Adult Education program in School Community Service (EDN 500). Specifically, the administration requests an $8 million general fund reduction for fiscal year 2003-2004 and fiscal year 2004-2005 and an associated $8 million increase to the federal fund ceiling for both years for Federal Impact Aid funding. Additionally, the administration requests a $2.7 million general fund reduction to Adult Education (EDN 500) and a concurrent $2.7 million increase to the Adult Basic Education Special Fund ceiling in fiscal year 2003-2004 and fiscal year 2004-2005. After considering the projected negative impact to both the Regular and Adult Education programs, your Conference Committee has again decided to exercise prudence and deny these reductions.

Your Conference Committee has also approved various additions to the DOE's base operating budget. However, most of your Committee's approved funding increases are to meet mandated costs. To meet collective bargaining agreed-to increments, your Conference Committee has approved a total of approximately $85.7 million in fiscal year 2003-2004 and fiscal year 2004-2005 in general funds. Additionally, your Conference Committee has added approximately $14.4 million in fiscal year 2003-2004 and $43.8 million in fiscal year 2004-2005, in general funds for employee pension accumulation costs. To meet rising Social Security and Medicare costs, your Conference Committee has approved approximately $9.5 million in fiscal year 2003-2004 and $12 million in fiscal year 2004-2005 in general funds. Finally, your Conference Committee has added approximately $6.4 million in fiscal year 2003-2004 and $18.6 million in fiscal year 2004-2005 in general funds to meet the increased cost of DOE employee health premiums. In total, your Conference Committee has approved approximately $116 million in fiscal year 2003-2004 and $160 million in fiscal year 2004-2005 to fund the new administration requested fixed program costs.

Your Conference Committee, again considering the State's current financial situation and your Conference Committee's commitment to opening and operating the Kapolei library, has appropriated $1 million for other current expenses, including books and equipment, for fiscal year 2003-2004 and nineteen positions and approximately $1.6 million for fiscal year 2004-2005 for the Kapolei Library. Although your Committee's adjusted appropriation for the library will delay its opening for a year, your Conference Committee believes that the appropriation configuration was a required compromise between the needs of the leeward community and fiscal prudence.

Your Conference Committee has also exercised prudence by adopting the new administration's request to reduce general funds in fiscal year 2003-2004 and fiscal year 2004-2005 from the overall HSPLS budget. Specifically, your Conference Committee has approved the reduction of approximately $551,000 for fiscal year 2003-2004 and $566,000 for fiscal year 2004-2005 from HSPLS's general fund budget. Your Conference Committee believes that the above-stated reduction to HSPLS's discretionary general fund budget is a balanced melding of department resource needs and fiscal constraint.

Your Conference Committee has approved a total education budget (which includes state libraries) of approximately $1.437 billion in general funds in fiscal year 2003-2004 and $1.488 billion in general funds in fiscal year 2004-2005. This budget also appropriates (19,469.15) general funded Full Time Equivalents (FTE) in fiscal year 2003-2004 and (19,471.15) general funded FTEs in fiscal year 2004-2005. By comparison, the administration education budget appropriates (20,369.65) general funded FTEs and approximately $1.425 billion in general funds in fiscal year 2003-2004 and (20,357.15) general funded FTEs and $1.471 billion in general funds in fiscal year 2004-2005. But for differences in appropriated general funded positions, which have been explained in the Special Education portion of this committee report, your Conference Committee's education budget and the new administration's budget are relatively close in total general funds appropriated. This similarity results from your Conference Committee's intent to be fiscally prudent and to adopt many of the new administration's budget reduction requests. The differences in the appropriated general funds also demonstrate your Conference Committee's exercise of due diligence, in providing additional resources (approximately $12 million in fiscal year 2003-2004 and $15 million in fiscal year 2004-2005) for specifically identified education needs.

Your Conference Committee continues to make access to quality public higher education opportunities in Hawaii one of its highest priorities. Your Conference Committee notes that the new administration proposed reductions totaling $3.2 million, or five percent of the university's discretionary general fund for fiscal years 2003-2004 and 2004-2005. This reduction would have adversely affected the Hilo campus, West Oahu campus, the small business development center, aquarium, and all of the community colleges. The effect of the reduction would have hampered the purchase of needed supplies, the replacement of equipment, the repair and maintenance of equipment and facilities, the hiring of lecturers and regular faculty and staff, the number of classes that can be offered, the level of State effort for federal fund matching, and the continuance or expansion of outreach programs. Your Conference Committee supports the university's goal of becoming a world-class institution and, therefore, could not concur with all of the new administration's proposed reductions.

Your Conference Committee sought to completely restore all of the fiscal year 2003-2004 and fiscal year 2004-2005 restrictions proposed by the new administration. However, due to continued fiscal constraints, your Conference Committee could only restore $1.7 million of the new administration's five percent discretionary general fund reductions to the University of Hawaii.

Your Conference Committee remains fully committed to ensuring that essential health related services remain a priority despite the current fiscal state of the Hawaii's economy. To this end, the appropriations authorized by your Conference Committee in the area of health will ensure sufficient funding for the essential services provided by the Department of Health.

Your Conference Committee commends the Department of Health for pursuing and receiving federal funding totaling $8.4 million to support and strengthen its capacity to respond to threats of bioterrorism and other public health emergencies resulting from terrorism. Your Conference Committee further affirms its commitment to health related issues by supporting the general practice dental residency program for disabled patients and restoring funds for emergency medical services equipment.

Your Conference Committee recognizes that the previous administration deleted positions and funding for the Developmental Disabilities Services Branch (DDSB) due to the closure of the crisis shelter and Waimano Training School and Hospital. Your Conference Committee was informed that DDSB, since 1999, has been providing safety net transition supports, as well as monitoring activities relating to residential settings for persons with developmental disabilities. This practice is consistent with national standards. Upon reviewing a request submitted by the Developmental Disabilities Division, a blueprint for a revised mission was laid out, detailing well-defined functions required for the proposed Disabilities Supports Branch (DSB). This clarified the functions required of DSB. Your Conference Committee supports the restoration of a total of twenty-four positions and $1,378,764 in fiscal year 2003-2004 and $1,237,396 in fiscal year 2004-2005.

On January 23, 2003, federal Chief District Judge David Ezra accepted the Community and Remedial Plan under an order of the court. The Community Plan replaces the Implementation Plan for Service Development (IPSD). The Community Plan is designed to ensure appropriate community services for individuals discharged, transferred or diverted from Hawaii State Hospital, and for individuals at risk of hospitalization at the Hawaii State Hospital.

Your Conference Committee affirms its full support of and commitment to the mentally ill population residing in Hawaii by approving and providing full funding to the Adult Mental Health Division's (AMHD) budget request totaling $2.68 million in the upcoming biennium to meet essential Community Plan requirements. Your Conference Committee notes that the additional requests for the next two years increase the total base funding amount for community outpatient services to $99.56 million. Your Conference Committee, after reviewing the proposed methodology to be used by the AMHD to determine the number of additional staff, has decided to provide temporary position counts in lieu of the seventy-nine permanent positions requested. Further, your Conference Committee was informed that AMHD has developed a statistical model to predict risk of hospitalization using regression analysis. Using this utilization management model, AMHD believes that it will be able to determine its annual target population, which will result in a more accurate caseload analysis for its staffing requirements. Once the reports from AMHD have been submitted, your Conference Committee believes that supporting permanent positions may be warranted.

Moreover, since 1991, the State of Hawaii has been under a Settlement Agreement with the United States District Court to comply with various stipulations and orders that included the Hawaii State Hospital (HSH) Remedial Plan for Compliance and the HSH Space Utilization Plan. The HSH Remedial Plan was made an order of the court on February 21, 2002, relative to the treatment and services at the Hawaii State Hospital. Your Conference Committee notes that the Community Plan, in conjunction with the HSH Remedial Plan, was found to meet the requirements of the court ordered Omnibus Plan and permits the State to meet its legal obligation in an efficient and accountable manner. Furthermore, your Conference Committee has provided a total of $23.70 million over the next two years to address the compliance issues with this court-ordered HSH Remedial Plan.

Your Conference Committee reaffirms its commitment to ensure that the mentally ill population receives the best available care. Based on AMHD's current assumptions on identifying all vacant positions that could be used to cover projected workload, your Conference Committee found it more prudent to provide funding for temporary positions at this time. Your Conference Committee is reassured that the AMHD will develop a better framework of its actual caseload analysis after reviewing its utilization management in the upcoming months. At that point, there will be a better basis for approving future permanent position counts.

Your Conference Committee is committed to the initiatives implemented under the Felix Consent Decree of December 31, 2001, which required meeting various fundamental benchmarks and measures including effective service coordination and appropriate family/child participation in the delivery of services and in the area of early intervention.

Your Conference Committee acknowledges that the Child and Adolescent Mental Health Division (CAMHD) has achieved substantial compliance with the terms of the decree. In meeting these mandates, your Conference Committee commends the division for reaching this milestone. Your Conference Committee is further cognizant that due to the decreased number of registered children and youth from 3,000 to 1,457 and lower utilization of residential programs and intensive services, CAMHD was able to realize a total cost savings of $17.14 million in each year of the biennium by reducing its purchase of service contracts; of this amount, $14.6 million was transferred to the Department of Education for contract services for youth with autism spectrum disorders.

Act 162, Session Laws of Hawaii 1996, established the Hawaii Health Systems Corporation (HHSC), to provide safety-net healthcare services particularly in the rural areas. Administratively attached to the Department of Health, the Corporation, through its twelve community hospitals, provides long-term, rural health, and primary acute care to all that require medical assistance.

To this end, your Conference Committee is committed to supporting the HHSC by providing a general fund subsidy totaling $31.22 million for the upcoming biennium to cover its projected shortfalls. Your Conference Committee acknowledges and shares in the plight faced by HHSC with regard to: its collective bargaining issues; payments to the Employees Retirement System and for health benefits for both current HHSC and for former employees; and the inability of the Med-QUEST program to pass the "disproportionate share" funds through the health plans to HHSC facilities; all of which have further exacerbated HHSC's healthcare crisis.

Although the former Community Hospitals Division has made significant improvements over the last seven years, your Conference Committee is, however, not without concerns relating to the basic fundamentals of the Corporation. Toward this end, your Conference Committee wishes to highlight a few areas of concern with regards to HHSC's fiduciary obligations and duties.

Your Conference Committee had some concerns this session regarding the Corporation's budget requests and justifications. For example, HHSC's revenues and expenditures were not easily understandable in light of its statement of revenues and expenses for the twelve facilities operated by HHSC, and the documents submitted by HHSC. Upon raising this issue, your Conference Committee was informed by the Corporation that the accounting method prescribed by HHSC was based on an accrual method of accounting--resulting in the variance reported by HHSC. Another example of the lack of clarity involved the breakout of HHSC's original baseline budget submittal to the Department of Budget and Finance. Your Conference Committee noted that the original biennial budget submittal was for $39.4 million and $44.6 million in fiscal years 2003-2004 and 2004-2005, respectively. In order to understand its original submittal request, your Conference Committee required further justification for the stated shortfalls and requested additional information. In its response, the HHSC submitted a spreadsheet highlighting these projected shortfalls. The Corporation, however, did not provide any explanation on how these numbers were derived. Facilities that were previously touted as being solvent were now projected to have shortfalls in the upcoming years.

Your Conference Committee, however, finds that during the last days of the 2003 session, an honest attempt was made by the executives of the Corporation to provide further clarification and information for use by your Conference Committee's staff. In this regard, your Conference Committee appreciates the efforts of the senior management of HHSC to be more forthright with the Legislature. Your Conference Committee hopes that this effort will continue on the part of HHSC's management to provide its fullest cooperation in assisting the Legislature in understanding its requests for general fund subsidy in future sessions.

Your Conference Committee further finds that the unfavorable reimbursements from government-type payors such as Medicaid and Medicare have added and exacerbated the revenue shortfalls for the HHSC of more than $35 million per year. Moreover, while your Conference Committee is aware that HHSC is not able to negotiate rates with the federal government for the Medicare program or with the State for the Medicaid program, your Conference Committee believes that the HHSC should continue to look for ways to make administrative and statutory changes to allow for more favorable rates to increase its revenue stream. Your Conference Committee is confident that the HHSC and the new administration will be resourceful and find creative means to resolve these issues relating to Medicare/Medicaid issues.

Your Conference Committee further notes that during the last few legislative sessions, HHSC cited collective bargaining as one of the primary factors contributing to its huge deficits. However, your Conference Committee does not believe that the collective bargaining costs provided by the Corporation portray an accurate picture of the actual costs. While your Conference Committee is aware that the HHSC believes it is necessary to contract for additional help, your Committee raises concerns about the use of three lobbyists under contract with HHSC. While it may not violate any ethics rules, your Conference Committee questions the appropriate use of $120,000 in State funds for such purposes, given there may be other pressing needs for the use of these funds within its twelve facilities.

Your Conference Committee also believes that the Corporation's procurement policies undermine the intent of fair competition because it avoids the competitive process, lacks accountability, provides for discretionary contracts, and allows purchases under $200,000, without Board of Directors approval. Toward this end, your Conference Committee is concerned about a number of its contracts.

For example, the HHSC had an annual $199,000 contract for a dialysis nurse on the neighbor islands for the period of May 6, 2002 through April 25, 2003. Your Conference Committee carefully reviewed the scope of services of this contract to justify the $199,000 contract amount and allowances. Your Conference Committee could not find any significant or specialized skills other than the requirement that the contractor must be a Registered Nurse (RN) licensed to practice in Hawaii. While your Conference Committee does not disagree with the need for the Corporation to contract for or hire a dialysis nurse for the Maui Memorial Medical Center (MMMC), your Conference Committee questions the high compensation paid to this contractor. Your Conference Committee is further distressed by four other contracts for dialysis nurses and the amounts contracted out for these services.

Due to the time constraints faced by your Conference Committee, a review of other contracts was not carried out. Another example of the imprudent use of State funds includes an aquarium maintenance contract for $8,000. Your Conference Committee also found a signed contract that was never encumbered by the Corporation for housekeeping services by the Four Seasons Resort in the amount of $23,000 for a one-month period in 2002.

Your Conference Committee does not believe that relying on the State for annual substantial incremental increases in general fund subsidy is an effective long-term solution for the Corporation. Your Conference Committee further understands that as a provider of safety-net services, the majority of its facilities are unlikely to achieve operating efficiencies to break even. Your Conference Committee also acknowledges and understands that managing and accounting healthcare revenues is complex and difficult to simplify. It is, however, the hope of your Conference Committee that HHSC and the new administration will be able to address these areas of concern and find alternatives to offset its professional services-on-a-fee contracts and the other issues addressed in this Conference Committee report.

In an effort to minimize the impact to the department's programs and recipients, your Conference Committee has been as judicious as possible in its reductions to the Department of Human Services.

Your Conference Committee looked to reduce funding in areas where the State currently receives little or no federal fund assistance in the form of a reimbursement for expenditures of state resources, but where such assistance is expected. One of the larger reductions, $7.3 million, is in the fiscal year 2004-2005 funding for Compacts of Free Association (CFA) recipients in the Med-QUEST program.

Prior to the Welfare Reform Act of 1996, CFA migrants were eligible to participate in federally funded Medicaid. However, the Welfare Reform Act prohibited the participation of aliens, including CFA migrants, in federally funded public assistance programs. As a result, the State has needed to request federal funds through the governor's office each year to partially offset CFA's medical and other costs. Recently, the Bush administration offered $15 million a year over the next two decades to help those areas most impacted. Hawaii and Guam will divide the bulk of these funds, as they have the largest number of CFA migrants. Your Conference Committee believes a large portion of these federal funds should be directed to the medical care of the CFA migrants. The fiscal problem facing the State of Hawaii by the services required for the CFA migrants escalates annually with estimates reaching $100 million for this fiscal year alone. To reduce the financial burden to Hawaii's public and private sectors, your Conference Committee encourages the new administration to urge the federal government to increase its assistance to Hawaii through appropriation of funds or revision to federal law. Your Conference Committee is also allowing time for the new administration to secure these federal funds by preserving funding for CFA recipients in fiscal year 2003-2004.

Under welfare reform there has been a strong emphasis on employment. The department of human services encourages individuals on welfare assistance to move toward self-sufficiency. The focus is on maximizing income to the household and removing disincentives to working. To encourage employment, the department has increased the income disregards and the asset exemption limits, as well as extended eligibility for medical and childcare assistance for those who have become gainfully employed. While your Conference Committee reduced TANF funding by $900,000 in fiscal year 2004-2005, the minimum maintenance of effort level will be sustained. Your Conference Committee is pleased with the direction of the department and encourages continuance of this effort.

In program areas where there are anticipated decreases in program population or costs, your Conference Committee has reprojected program-funding requirements based on prior expenditure levels. With regards to General Assistance, your Conference Committee reduced funding by $1.9 million in fiscal year 2003-2004 and $2.1 million in fiscal year 2004-2005 to reflect decreases in the program population. While these reductions are large, the department of human services will be able to continue current monthly benefit levels.

Your Conference Committee has provided increases in funding to program areas where population growth and rising costs are anticipated to impact program needs.

Soaring medical costs, especially in the area of prescription drugs, have impacted several programs in different departments throughout the State, prompting the need for large increases in expenditures. These escalating medical costs are not limited to Hawaii, as the nation as a whole continues to struggle with this crisis.

The Med-QUEST program, which provides medical care to the State's low-income population through the Title XIX Medicaid program, is beset by these cost increases, necessitating your Conference Committee to appropriate an additional $38.4 million and $49.3 million in general funds for fiscal year 2003-2004 and fiscal year 2004-2005, respectively, and another $75.6 million and $90.9 million in federal funds for fiscal year 2003-2004 and fiscal year 2004-2005, respectively.

Another area facing population and cost increases is child welfare services. There has been a marked rise in the number of children requiring maintenance outside of their family home due to abuse, neglect, or the inability of the family to provide adequate care and supervision. Your Conference Committee increased funding by approximately $4.2 million in fiscal year 2003-2004 and $6.8 million in fiscal year 2004-2005 for child placement board and related payments, to provide these children with an adequate standard of living.

Your Conference Committee has taken a fiscally responsible approach regarding the new administration's Capital Improvements Projects (CIP) budget. The new administration's proposed $554 million in general obligation (G.O.) bond expenditures over the fiscal biennium has been reduced by your Conference Committee to $400 million. Your Conference Committee believes this reduction is necessary to control the ever-rising cost of debt service paid by the state. By reducing the G.O. bond expenditures the State could potentially save over $262 million over the next twenty years.

The majority of the capital expenditures your Conference Committee provides are directly invested in the State's educational infrastructure. Your Conference Committee approved $192 million for deposit to the State Educational Facilities Improvement Special Fund. These funds will be used for the construction of new school facilities, as well as improving and upgrading existing public school facilities. In addition, your Conference Committee approved $42 million for major repairs to protect the structural integrity and aesthetics of school buildings.

In order to enhance the learning environment for students at University of Hawaii campuses, your Conference Committee approved nearly $30 million for the repair, upgrade, and improvement of University facilities and infrastructure.

In addition, much of the remaining new capital expenditures your Conference Committee has provided for address many health and safety needs of various facilities and institutions across the State.

Your Conference Committee believes that it may be a long and hard road ahead to economic recovery. Even in these challenging times, your Conference Committee has provided the resources necessary to meet all of the State's critical needs. Your Conference Committee's commitment to higher and lower education, health, and human services is clearly evidenced in its actions.

As affirmed by the records of votes of the managers of your Committee on Conference that are attached to this report, your Committee on Conference is in accord with the intent and purpose of H.B. No. 200, H.D. 1, S.D. 1, as amended herein, and recommends that it pass Final Reading in the form attached hereto as H.B. No. 200, H.D. 1, S.D. 1, C.D. 1.

ON THE PART OF THE SENATE ON THE PART OF THE HOUSE