Honorable Robert Bunda

President of the Senate

Twenty-Second State Legislature

Regular Session of 2003

State of Hawaii

Sir:

Your Committees on Ways and Means, to which was referred H.B. No. 200, H.D. 1, entitled:

begs leave to report as follows:

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

Never has your Committee been faced with the level of fiscal uncertainty it has this session. Declining projected State revenues and tenuous geopolitical issues, coupled with increasing needs throughout the State, have had a great impact on the manner in which your Committees constructed this Biennium Budget. Your Committee performed the painful task of choosing among competing valid needs and sets forth, herein, its priorities.

On March 17, 2003, just two days before the start of the war with Iraq, the Department of Business, Economic Development, and Tourism’s (DBEDT) Quarterly Forecast reported:

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 continued to weaken even before the war with Iraq had begun. The Blue Chip Economic Forecast, based on an average of 50 major U.S. forecasts, adjusted the forecast for growth in real U.S. GDP in 2003 downward in February 2003 from 2.8 percent 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 stronger 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, as an example of the immediate impact the war has had on visitor arrivals, the number of passengers on international flights to Hawaii fell 29 percent on the first day of the war. State figures also show that Mainland visitors are staying home.

The majority of the above economic forecasts attempted to recognize changed national and international security conditions. None, however, assumed that the U.S. would be at war. While the State’s leading economists continue to disagree on the war’s future economic impact on the State, your Committee believes that Hawaii will experience a decline in revenues, at least in the short-term. As such, your Committee took a proactive approach in formulating the budget. Your Committee believes that many of the reductions made throughout the budget are necessary to provide for the most critical of services should revenues continue to fall.

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 already have taken action to close them. Seventeen report no gap or indicate that it is too early to specify the size of a potential budget gap. Two states did not provide information.

• The revenue outlook for the remainder of the fiscal year does not reflect confidence for a strong 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.

Last year, many states were able to use 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 1 percent while 18 states raised taxes more than 1 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 extensive. 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 common problems. Declining revenues and growing demands will necessitate intense scrutiny of State budgets. Other states are dealing with their shortfalls in ways similar to the choices made by your Committee. For example, 31 states are imposing budget cuts, 28 states are tapping various state funds, 14 states are tapping rainy day funds, and 21 states are using tobacco settlement funds.

Revenue collections have been sluggish during the first four months of the fiscal year, and overruns, particularly in Medicaid programs, are already being reported in at least 24 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. States may be looking at raising the standards for Medicaid eligibility.

At its meeting on January 7, 2003, the Council on Revenues forecast 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. The credits that had 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. Again, the Council’s projections did not take into account war with Iraq or potential losses of federal allocations (as a result of the war). Also, it only considered existing tax laws.

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 current administration’s approach to balancing the budget does not allow for the transfer of any monies from the HHRF, reductions in force, or any tax increases. Consequently, the current administration looked at alternatives such as a 5 percent reduction to "discretionary" general fund expenditures, transferring balances from various non-general funds, imposing a statewide hiring freeze, and reductions in 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 your Committee.

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 special funds to the general fund, providing an estimated $24 million;
• Restructure debt and revise the interest rate assumption, providing an estimated $50.8 million;
• Revisit Act 221 Tax Credit Adjustments 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.

The State’s fiscal situation has required your Committee to carefully set priorities. Your Committee has focused particularly on public education. In setting its priorities, your Committee has tried to accommodate the current administration's priorities of not laying off public employees, not using the hurricane relief fund, increasing the standard deduction, and other tax measures. In order to meet these seemingly mutually exclusive goals, your Committee in HB 510, raises the general excise tax one-half percent, dedicating two-thirds or $120 million in anticipated revenue to public education. The general excise tax increase allows your Committee to reduce or eliminate some of the reductions proposed by the administration. It also allows, in some instances, increases in appropriations. Absent the general excise tax increase, education, particularly lower education, would be hard pressed to deliver the level of service expected of it, meet the requirements of Felix, and meet the requirements of No Child Left Behind. Both of these federal mandates increase costs to the State without adequate federal support.

Your Committee has prudently reviewed the budget, made further reductions, and tried to permit flexibility in allowing the administration to implement the budget.

Your Committee continues to make education its top priority. Given present economic uncertainties, your Committee sought to earmark additional funding for education through HB 510. This measure creates the Education special fund, whereby all monies deposited would be earmarked for additional funding for each of the forty-two school complexes on a per pupil basis and additional repair and maintenance for each of these schools. In addition, a portion of the revenue derived from HB 510 would be set aside for the University of Hawaii. In total, the additional funding would amount to $120 million more for our public schools.

Your Committee has also passed HB 1554, which allows the counties to adopt a one percent retail sales tax that would be collected by the state department of taxation. The retail sales tax will assist the counties in balancing their budgets without increasing the real property taxes. The real property tax falls on real property owners, while a retail sales tax would be shared by everyone, including visitors to Hawaii. In return, counties adopting a retail sales tax would allow the State to retain and place in the general fund all or part of the transient accommodations taxes now shared with the county. This will assist the State in meeting its general fund requirements.

As previously mentioned, 28 states have tapped various state funds to meet budget shortfalls. Given the current fiscal crisis, your Committee has examined these funds as well. Your Committee has identified $63.3 million in non-general fund cash balances to be transferred to general fund via HB 1152. With the magnitude of transfers your Committee proposes, fund administrators will need to closely monitor revenues and expenditures. While your 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 there core goals.

As a result of the growing needs reflected in the budget, your 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 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.

Your Committee also feels it 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% in fiscal year 2000-2001 and 5.9% 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 required pension accumulation for the State.

There is at least one positive aspect in relation to the State’s non-discretionary cost items. Lower interest rates have presented the State with an opportunity to realize savings in debt service. 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 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.

Without the use of the HHRF funds, increases in taxes, or reductions in force to assist in balancing the budget, the current administration found it necessary to propose a 5 percent reduction to the discretionary general fund budgets of the majority of departments.

Your Committee had a difficult time trying to work within the framework established by the current administration. Given this limitation, your Committee carefully examined positions identified as vacant since December 31, 2001. Your Committee’s position is that although the departments may still prefer to maintain these positions, they have made great strides in adjusting 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 Committee’s hope that when Hawaii’s economy recovers, these vacancies may be restored.

Your Committee has adopted the prior administration's instructions to state directors regarding their preparation of department Fiscal Biennium 2003-2005 budgets, when evaluating the requests of the department of education (DOE) and the Hawaii State Public Library System (HSPLS). These instructions emphasized that this biennium budget proposals be "prudent yet relevant . . . accurate but flexible." Your Committee's approved budgets for the department of education and the HSPLS are prudent, accurate, and flexible.

Your Committee acted prudently by adopting most of the prior administration's budget proposals, which internally reallocated resources, both within and between department of education programs, to address specific departmental needs. Your Committee readily approved prior administration proposals to transfer funds from various programs and other cost categories to address department salary shortfalls within Regular Education (EDN100) and Comprehensive School Support Services (EDN150).

Your Committee has 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. Utilizing the funds reduced in the department's Food Services program, your Committee has approved the transfer of lump sum general fund adjustments to Regular Education (EDN100), which 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. Utilizing the same funds, your Committee has also approved the transfer of approximately $5.9 million in fiscal year 2003-2004 and fiscal year 2004-2005 to Comprehensive School Support Services (EDN150) to offset a projected salary shortfall. The proposed reductions and transfer of funds are based on projected increases of Food Services special and federal funds, expenditures from which are expected to take the place of or supplant the amount of general fund appropriations reduced. Your Committee believes that, given the uncertainty of the State's economy, it is prudent to allow the proposed reductions to the Food Services program. However, your Committee will remain flexible in order to possibly address the feasibility of reduction during the supplemental budget legislative session.

Your Committee has approved the prior administration's proposed transfer of resources from the department of health (DOH) to DOE, which would supplement the department's Special Education and Felix Consent Decree services. The DOE's Comprehensive School Support Services (EDN150) budget has been augmented by the addition of approximately $250,000 for fiscal year 2003-2004 and fiscal year 2004-2005, which reflects the transfer of DOH's Childrens Community Council Office to DOE's School Based Behavioral Health program. The DOE's EDN150 budget has also been increased with the addition of (24) temporary positions, (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. The current administration has followed the lead of the previous executive and has brokered an agreement between the DOH and DOE, which allows for the transfer of $14.6 million, in fiscal year 2003-2004 and fiscal year 2004-2005, to DOE's Services for Children with Autism program, primarily to fund contract services. Your Committee has approved this request to transfer autism contract services funding to the DOE's Special Education budget.

In addition, your Committee has approved the conversion of (275) temporary Comprehensive School Support Services (EDN150) positions, which are primarily Felix Response Plan (FRP) and School Based Behavioral Health (SBBH) positions, to permanent status. Although, the prior administration requested the conversion of (1,686.50) temporary positions to permanent, your Committee believes it was prudent, at this writing, to convert only a specific number of positions. In the 2002 Supplemental Appropriations Act, i.e., Act 177, SLH 2002, your Committee requested that the DOE complete a comprehensive needs assessment of the FRP and SBBH programs. After examination of the submitted information and discussions with DOE Special Education and Human Resources staff, your Committee has determined that (275.00) temporary positions require immediate conversion to permanent status based on the critical services they provide to Felix and Special Education students. Your Committee has selected the type and number of positions to be converted, which includes (226) SBBH Specialist positions, (46) School and Complex Psychologist positions, and (3) Integrated Special Education Data program (ISPED) positions. Your Committee has included a proviso which, among other requirements, requests the DOE to continue its ongoing needs assessment and report to the legislature prior to convening of the 2004 and 2005 legislative sessions, in order that your Committee may continue its efforts to determine the appropriate number of additional positions to convert to permanent status in the future.

In summary, your Committee has increased resources for the DOE's Felix and Special Education programs by approving the transfer of DOH general funds and positions for Services for Autistic Children and, utilizing an exacting and deliberate procedure, approving the addition of (275) permanent Felix Response Plan (FRP) and School Based Behavioral Health Services (SBBH) positions. Although, your Committee did not fully approve the executive's request to convert all (1,686.5) positions, complete funding for these positions remains in the DOE's budget. While your Committee continues to scrutinize the department for waste and/or excess, the DOE's Felix and Special Education programs base resources (EDN150), in general, remain intact. The Special Education budget approved in this bill clearly demonstrates your Committee's commitment to maintaining compliance under the Felix Consent Decree and, more importantly, providing the requisite educational services to students with disabilities.

Your Committee decided to adopt the current administration's proposed 5 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, which are reflected in percentage reductions to Regular Education (EDN100) (approximately $2.7 million per year); School Instructional Support (EDN200) (approximately $94,000 per year); State and District Administration (EDN300) (approximately $144,000 per year); and School Community Service (EDN500) (approximately $38,000 per year). Although your Committee has reluctantly accepted this reduction to the department's overall budget, your Committee is relying on the wisdom and flexibility of the 2003 Legislature and current administration to approve the passage of HB510, which would increase the general excise tax (GET) by ½ percent, allowing $120 million for education. Passage of the bill would allow for the restoration of the department funding lost by this reduction.

Your Committee has considered the current administration's requests to reduce discretionary general funds from the base budgets of Regular Education (EDN100) and School Support (EDN400). Specifically, the current administration requests the reduction of $5 million in fiscal year 2003-2004 and fiscal year 2004-2005 in EDN100 and the reduction of $3 million in fiscal year 2003-2004 and fiscal year 2004-2005 in EDN400. Based on information provided by DOE, the requested $5 million per year reduction in EDN100 would eliminate three (3) lump sum additions requested by the previous administration and approved by your Committee in this budget. The approved lump-sum additions to the EDN100 budget 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. Your Committee has deliberated over the requested reduction to EDN100 and has decided to deny this request.

Your Committee based its decision on the following. 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. The DOE has informed your Committee that Act 177, 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 the $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. As such, your Committee has approved the prior administration's request for additional charter school funding and denied the current administration's request to retract this funding.

To further insure the solvency of the charter school program your Committee has included a budget proviso that clarifies, for the DOE, that any funds allocable to the charter schools are determined via statute and, therefore any reduction to the statutorily determined amount must be explicitly stated in and justified under current Hawaii charter school law. Your Committee believes that the lump-sum adjustment for rental payment for Nanaikapono School also qualifies as a fixed and mandated cost for the State. Additionally, your 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 Committee reviewed the requested $3 million general fund reduction for School Support (EDN400). Your Committee is cognizant that the reduction represents a retraction of the previous administration's request for a lump-sum general fund addition to address increased custodial needs, e.g., supplies and equipment, for multi-track schools as well as other pressing school maintenance requirements. Your Committee decided that it could not, in good conscience, restore both the Regular Education (EDN100) reduction of $5 million and the $3 million reduction for School Support (EDN400). Therefore, your Committee, being well aware of the hygiene needs of our schools, has decided to err on the side of fiscal caution and approve the $3 million reduction to School Support. Your Committee is hopeful that the approved $3 million reduction will be addressed and, hopefully, restored by the passage of HB510 via an increase in the general excise tax.

Your Committee has also received two late-hour requests from the current administration to reduce the base general fund budgets for Regular Education (EDN100) and the Adult Education program in School Community Service (EDN500). Both reductions include associated requests to increase other related fund ceilings, i.e., the Federal Impact Aid Fund in EDN100 and the Adult Basic Education Special Fund in EDN500. These intentionally paired executive reduction and addition requests reflect the administration's intent to supplant the respective general fund reductions with increased federal and special fund expenditures. Specifically, the administration requests an $8 million general fund reduction for fiscal year 2003-2004 and fiscal year 2004-2005 for EDN100 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 (EDN500) and a concomitant $2.7 million increase to the Adult Basic Education Special Fund ceiling in fiscal year 2003-2004 and fiscal year 2004-2005. Your Committee, after considering the late hour of the requests, the lack of details on the practicality of implementing the suggested supplanting of the program general funds with federal and special funds, and conflicting administration and DOE accounts on the efficacy of the proposed reductions and supplanting, has decided to deny the requests.

Your Committee has approved numerous additions to the DOE’s base operating budget. However, most of your Committee's approved funding increases have been added to meet mandated costs, which are requested by the previous and current administrations. To meet collective bargaining agreed-to increments, your Committee has approved a total of approximately $85.7 million in fiscal year 2003-2004 and fiscal year 2004-2005 (this includes increased collective bargaining funding for the Hawaii State Public Library System's (HSPLS) of approximately $2.1 million per year), in general funds. Additionally, your 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 Committee approved approximately $9.5 million, in fiscal year 2003-2004 and $12 million in fiscal year 2004-2005, in general funds, for these mandated expenses. In addition, your 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 Committee has added approximately $116 million in fiscal year 2003-2004 and $160 million in fiscal year 2004-2005 to fund executive requested mandated program costs.

Your Committee has also responded favorably to the prior administration's requests to provide additional resources for new facilities (EDN100). Specifically, your Committee has added approximately $3 million in fiscal year 2003-2004 and $1 million in fiscal year 2004-2005, in general funds, for textbooks, equipment and supplies for newly constructed regular education facilities. Your Committee has also added approximately $127,000 in fiscal year 2003-2004 and $100,000 in fiscal year 2004-2005, in general funds, for books, equipment and supplies for new school library facilities; approximately $128,000 in fiscal year 2003-2004 and $38,000 in fiscal year 2004-2005, in general funds, for textbooks, equipment and supplies for new Special Education facilities; and approximately $27,000 in fiscal year 2003-2004 and $23,000 in fiscal year 2004-2005, in general funds, for equipment and supplies for new school administration facilities.

Your Committee has also approved the prior administration's requests for additional resources, which result from projected department workload increases. Specifically, your Committee has approved the prior administration's request to add (14) custodial positions and approximately $276,000 in general funds in fiscal year 2003-2004 and (20.5) custodial positions and approximately $458,000 in general funds in fiscal year 2004-2005 for new classrooms and facilities (EDN400).

Your Committee shares the DOE's concern for school safety. Creating safe schools is one of the first steps in establishing effective learning environments. To address this concern, your Committee resurrected and approved a 2003 Board of Education request, not submitted by the executive, to add (10) school safety attendants (SSA's) and approximately $141,000 in general funds in fiscal year 2003-2004 and (12) SSA's and $197,000 in general funds for (11) existing schools due to increased enrollment. This addition is reflected in the EDN100's campus supervision and patrol program.

Your Committee has taken a bifurcated approach to crafting the Hawaii State Public Library System (HSPLS) budget. Your Committee remained committed to the establishment of the New Kapolei Public Library by approving the prior administration's request to add (19) permanent positions and approximately $1.6 million in general funds in fiscal year 2003-2004 and (19) positions and $1.5 million in general funds in fiscal year 2004-2005 to support the Kapolei Library. This appropriation is consistent with the Legislature's previous addition of (5) positions and approximately $266,000 in general funds in fiscal year 2002-2003 for Kapolei Library.

Your Committee adopted the current administration's request to reduce two positions and approximately $1 million in general funds in fiscal year 2003-2004 and fiscal year 2004-2005 from the overall HSPLS budget. This reduction represents a 5 percent discretionary general fund reduction.

Your 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 $1.486 billion in general funds in fiscal year 2004-2005. This budget also appropriates (18,966.15) general funded FTEs in fiscal year 2003-2004 and (18,953.65) general funded FTEs in fiscal year 2004-2005. By comparison, the prior and current 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. Except for differences in appropriated general funded positions, which have been explained previously, your Committee's education budget and the executive budget are relatively close in total general funds appropriated. This similarity reflects your Committee's intent to be prudent and adopt many of the executive's budget reduction requests. The differences in the appropriated general funds demonstrate the flexibility exercised by your Committee in providing additional resources (approximately $12 million in fiscal year 2003-2004 and $15 million in fiscal year 2004-2005) for identified education needs.

Finally, your Committee has determined that the requirements imposed on the State by the federal No Child Left Behind Act (NCLB) need additional investigation. Your Committee's has included a proviso, authored by the State House of Representatives, in H.D.1 of this appropriations bill, which requests the DOE to complete a comprehensive needs assessment associated with the department's efforts toward meeting and maintaining compliance under NCLB, which would identify resources necessary for the department to maintain NCLB compliance. In the future, your Committee will utilize the information contained in the department's NCLB needs assessment to determine whether the necessary level of resources, needed to maintain federal NCLB compliance, can be cost effectively provided by the State.

Your 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, your Committee affirms its commitment to health related issues by supporting the general practice dental residency program for disabled patients and restoring funds for equipment for the Emergency Medical Services. Your Committee commends the department 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 thus strengthening Hawaii’s public health infrastructure.

Your 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 Committee was informed that the DDSB, since 1999, has been providing safety net transition supports as well as monitoring activities relating to residential settings for persons with developmental disabilities that are consistent with best practices nationally. Upon reviewing a white paper submitted by the Developmental Disabilities Division, which serves as a blueprint to determine the revised mission as well as clarify the functions required for the proposed Disability Supports Branch (DSB), your Committee supports the restoration of 24 positions and $1.63 million in fiscal year 2003-2004 and $1.49 million in fiscal year 2004-2005.

On January 23, 2003, Chief District Judge David Ezra accepted the Community Plan, which was made an order of the court replacing the Implementation Plan for Service Development (IPSD). The Plan for Community Mental Health Services is designed to assure 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 Committee affirms its full support of and commitment to the mentally ill population residing in Hawaii by approving and providing the Adult Mental Health Division (AMHD) with its full funding request totaling $2.68 million in the upcoming biennium to meet essential Community Plan requirements. Your 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 Committee, after reviewing the proposed methodology used by the AMHD to determine the number of additional staff requirements, provided temporary position counts in lieu of the 79 permanent positions requested. Further your Committee was informed that the AMHD has developed a statistical model to predict risk of hospitalization using logistic regression. Using this utilization management model, the AMHD believes that it will be able to determine its annual target population, which in turn will result in a better caseload analysis for its staffing requirements. Your Committee believes that supporting permanent positions would be warranted at that time.

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, which 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 Committee notes that the Community Plan in conjunction with the HSH Remedial Plan were 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.

Your Committee provided a total of $23.70 million over the next two years to address the compliance issues with the court-ordered HSH Remedial Plan. Your Committee further notes that the additional funding request for the fiscal biennium brings the adult mental health – inpatient services’ total base budget to over $86.05 million. Your Committee reaffirms its commitment to ensure that the mentally ill population is afforded the opportunity to receive the best available care. Based on AMHD’s current assumptions on identifying all vacant positions that could be used to cover projected workload, your Committee found it more prudent to provide funding for temporary positions at this time. Your Committee is reassured that the AMHD will develop a better framework for its actual caseload analysis after reviewing its utilization management in the upcoming months to form a better basis for approving future permanent position counts.

Your 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 Committee acknowledges that the Child and Adolescent Mental Health Division (CAMHD) has achieved substantial compliance with the terms of the decree and in meeting the mandates and your Committee commends the division for reaching this milestone. Your Committee supports CAMHD, during this sustainability period, and appropriates $600,000 in each year of the biennium for the Office of the Felix Court Monitor. Your 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.

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

First, your Committee looked to reduce funding to groups where the State receives little or no federal fund assistance in the form of a match. One of the larger budgeted items reduced is the funding ($7.3 million) for Compacts of Free Association recipients in the Med-QUEST program.

Prior to the Welfare Reform Act of 1996, citizens of the countries with Compacts of Free Association (CFA) were allowed to participate in federally funded Medicaid. The Welfare Reform Act failed to address CFA migrants, when prohibiting the participation of other aliens in federally funded public assistance programs. The result of the omission is the exclusion of CFA aliens from federally funded Medicaid participation. The State has been requesting federal funds for the CFA’s medical and other costs annually through the governor’s office. The Bush administration recently offered $15 million a year over the next two decades to help those areas most impacted. Hawaii and Guam have the largest number of CFA migrants and should divide the bulk of the $15 million. Your Committee believes a large portion of these federal funds should be directed to the medical care of the CFA migrants.

In program areas where there are anticipated decreases in program population or costs, your Committee has reprojected program-funding costs in an attempt to mimic expenditure expectations.

For example, under welfare reform there has been a strong emphasis on employment. The department’s intent is to encourage individuals on welfare assistance to move toward self-sufficiency. The focus is to maximize income to the household and remove disincentives for working. To encourage employment, the department has increased the income disregards and the asset exemption limits, as well as extending eligibility for medical and childcare assistance for those who have become employed. While, your Committee did reduce TANF by approximately $1 million to reflect the minimum maintenance of effort level, your Committee agrees with the direction of the department and encourages the continuance of this effort.

Despite the fiscal constraints on the State, your Committee did increase funding to program areas where population growth and rising costs impacted program needs.

Soaring medical costs, especially prescription drugs costs have impacted several programs in different departments throughout the State, prompting a large increase in expenditures. These escalating medical costs are not limited to Hawaii, as the nation as a whole continues to be plagued by this crisis.

The Med QUEST program, which provides medical care to the State’s low-income population through the Title XIX Medicaid program has been beset by these cost increases, necessitating your Committee to appropriate an additional $38 million and $49 million in general funds for fiscal year 2003-2004 and fiscal year 2004-2005 and another $75 million and $90 million in federal funds for fiscal year 2003-2004 and fiscal year 2004-2005.

Another area facing cost and population increases is childcare 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 them with adequate care and supervision. Your Committee has thus 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 Committee notes that over the last five years, the University of Hawaii has absorbed approximately $8.4 million in executive restrictions. The Governor proposed additional reductions of $3,478,000 or five percent of the university’s discretionary general fund for fiscal years 2003-2004 and 2004-2005.

The approximate $3.4 million reduction affects 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 Committee supports the university’s goal of becoming a world-class institution and therefore, in good conscience, cannot concur with the governor’s proposal.

Your Committee noted that in fiscal year 1997-1998, in anticipation of a proposed payroll lag, the Governor restricted approximately $10.5 million in general funds. Although the university faculty union successfully blocked the payroll lag action, the restriction was never released. The university was forced to meet the June 30, 1998, payroll of approximately $6.4 million with funds designated for other purposes. To date, the university is still feeling the effects of the $6.4 million restriction, as the moneys have not been restored. With various executive restrictions in previous years, and other payroll shortfalls, the university is currently experiencing approximately $19 million in unfunded vacant positions.

To address these accumulated funding gaps, your Committee immediately proposes to initially restore $1,678,000 of the Governor’s 5 percent discretionary general fund reductions to the University of Hawaii.

Ideally, your Committee desires to restore all of the fiscal year 2003-2004 and fiscal year 2004-2005 proposed executive reductions to the university. However, your Committee realizes that in the face of the Council of Revenues’ lower projections, the stagnant economy, and the unstable political situations in the Middle East and Asian regions, the restoration and maintenance in levels of funding becomes increasing difficult. Your Committee also had a difficult time in keeping with the Governor’s wishes of not using the Hawaii Hurricane Relief Fund, no State employee layoffs, and providing tax relief. However, even the Governor admitted that Hawaii is currently facing a difficult fiscal reality. Given the fiscal limitations, your Committee feels that a modest general excise tax increase of one-half percent dedicated primarily to educational purposes will assist in meeting shortfalls.

Lastly, the previous administration’s budget that was submitted by the current administration included a $5 million lump sum increase in the university’s general fund appropriation. The current Governor subsequently retracted the request. Again, with the current economic situation, your Committee has agreed with the new administration’s decision in not providing the requested additional funding. It is again hoped that with House Bill 510, education can be provided for at the financial level that your Committee intends.

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

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. 200, H.D. 1, as amended herein, and recommends that it pass Second Reading in the form attached hereto as H.B. No. 200, H.D. 1, S.D. 1, and be placed on the calendar for Third Reading.