Honorable Calvin K.Y. Say

Speaker, House of Representatives

Twenty-Second State Legislature

Regular Session of 2004

State of Hawaii

Sir:

Your Committee on Finance, to which was referred H.B. No. 1800 entitled:

begs leave to report as follows:

The purpose of this bill is to amend the General Appropriations Act of 2003 (Act 200, Session Laws of Hawaii 2003), which appropriated funds for the operating expenses and capital improvement costs of the Executive Branch for the fiscal biennium from July 1, 2003, through June 30, 2005 (FB 2003-2005).

Your Committee has labored to craft a balanced budget that is responsive to the needs and demands of our communities. A clear message evolved throughout the past legislative interim:

• The education system must be reformed to improve student achievement;
• The crystal methamphetamine ("ice") epidemic must be confronted; and
• Residents must have relief from the skyrocketing prices of prescription drugs.

The status quo is unacceptable. This budget ensures that the State will answer the call in each of these priority areas. In addition, this is a budget that is balanced without any tax increases.

In considering this bill and other bills that affect state finances, your Committee worked closely with the Administration to identify additional resources to fund the priority programs and services called for by Hawaii's residents. Your Committee has balanced the budget while ensuring the availability of adequate resources to:

• Reform our public school system with a focus on the factors that truly improve student achievement;
• Fight the ice crisis with comprehensive and balanced initiatives; and
• Make prescription drugs affordable and accessible to as many as 300,000 persons who lack adequate medical insurance by approving the Hawaii Rx Plus Program.

Although economic indicators suggest strong economic growth and the Council on Revenues continues to project strong revenue growth, your Committee took a prudent and fiscally responsible approach to balancing competing demands for resources in the development of this Executive Supplemental Budget.

Enhancing and reinventing the public education system is critically important for ensuring a bright future for Hawaii's children and continuing to improve the State's economy. Your Committee agrees with your Committee on Education that these efforts to reform education must put students first, and must focus on actions that will clearly improve student achievement. Accordingly, your Committee strongly supports the steps taken in H.B. No. 2002, H.D. 2, to restructure the public education funding system. H.B. No. 2002, H.D. 2, recognizes that every community is deeply concerned and passionate about their children. No special interest group or political party can claim that it alone has all the answers to the question of educational reform; it is clear that reform is the people’s priority.

There is broad consensus that the cornerstone of improving the delivery of educational services to our children is to move funds directly to the school through a weighted student formula that allocates funds based on each student's unique learning needs. The Governor, the Legislature, the Hawaii Business Roundtable, and private citizens throughout the state have all endorsed this plan.

Your Committee worked closely with your Committee on Education and has listened to many experts in the field. The reform actions and programs in H.B. No. 2002, H.D. 2, put students first by:

• Ensuring that textbooks and other necessary resources reach the classroom;
• Lowering class size;
• Placing governance in the hands of the school's community;
• Encouraging parent involvement in the schools;
• Training school leaders;
• Rewarding teacher excellence; and
• Streamlining the state bureaucracy.

This approach is designed to improve student achievement, the ultimate goal of any meaningful reform. To achieve reform, H.B. No. 2002, H.D. 2, includes:

• $3,000,000 for textbooks and learning materials doubling the current appropriation for schools;
• $2,143,350 to lower average class-size for kindergarten, first grade, and second grade;
• $250,000 for the new School Community Councils to enhance school-community joint decision-making;
• $1,743,900 to establish Parent-Community Networking Centers (PCNCs) at every school and ensure adequate funding at existing PCNC sites;
• $10,000 for the operations of the Committee on Weights, which will be instrumental in implementing the weighted student formula;
• $500,000 for a Principals Academy to provide leadership training, and training in the school level budgeting required to implement the weighted student formula;
• $183,780 for the Administrators Certification for Excellence Program which is an essential part of principal training; and
• $480,000 to support and reward teachers seeking National Board Certification.

Student achievement will improve when we have smaller classes, adequate textbooks, quality teachers, strong school leadership, participation from parents, and a sense of ownership and responsibility within the community. The actions taken and the programs funded in H.B. No. 2002, H.D. 2, put students first, and are important steps toward educational excellence.

Your Committee recognizes the work of the Joint House and Senate Task Force on Ice and Drug Abuse Abatement (Ice Task Force), and its laborious efforts to research the issues, travel statewide to listen to diverse communities, and boldly put forth a plan to address the ice crisis. While the Administration may believe that additional studies are needed, the current situation is unacceptable. The status quo is unacceptable. Over 6,000 ice users need treatment, and of these, fewer than 3,000 are able to access publicly funded treatment. The Ice Task Force found that women of childbearing age, pregnant women, parents with young children in the home, and Hawaiians are underserved, and should be given priority in receiving publicly funded substance abuse treatment.

The Ice Task Force recommended diverting drug offenders into treatment rather than prison as a more effective and successful means of reducing recidivism. It found that funding treatment services for nonviolent, first-time drug offenders will avoid imposing a greater burden on the State's prison system and will reduce the costs of incarcerating offenders. Your Committee refers to President Bush’s radio address on February 28, 2004, where he stated that "the best way to cut drug use is to cut demand for drugs at the ground level." Consistent with the President's plans to deal with drugs at the high school and community level, H.B. No. 2004, H.D. 1, provides funding to address the ice epidemic through community- and school-based prevention and treatment.

Your Committee has identified additional resources to begin the serious effort required to deal with the crystal methamphetamine crisis that has burdened every community in our state. To respond to the call heard clearly from communities across the state, your Committee appropriates funds, through H.B. No. 2004, H.D. 1, for a multipronged approach to the crisis. This approach improves and extends the State’s drug use prevention, drug abuse treatment, and public safety programs. Appropriations in H.B. No. 2004, H.D. 1, include:

• $7,000,000 for adult treatment services, including family counseling, with priority given to women of childbearing age, pregnant women, parents with young children in the home, and Hawaiians;
• $4,500,000 for school-based treatment programs in high schools and middle schools/intermediate schools;
• $2,000,000 for substance abuse prevention, with priority given to drug education and awareness in the schools, community partnerships, nonschool youth activities in communities with the greatest need, education and support for families and parenting women, and community mobilization;
• $1,430,000 for treatment of first-time, nonviolent drug offenders and any such drug offender sentenced to probation under sections 706-622.5 and 706-625, Hawaii Revised Statutes(HRS);
• $1,200,000 for the expansion of drug court programs, including those of juvenile and family drug courts;
• $1,000,000 as a grant-in-aid to the various counties to fund community-based substance abuse prevention programs, with priority given to drug education and awareness in the schools, community partnerships, non-school youth activities in communities with the greatest need, and education and support for families and parenting women, to be matched by federal or private funds;
• $300,000 for a study and analysis of the effects of clandestine methamphetamine laboratories on the environment (particularly ground water), disposal of toxic waste materials found at the laboratory site and site removal, and recommendations for action;
• $150,000 and $250,000 to implement the Substance Abuse Treatment Monitoring Program, to be expended by the Departments of Health (DOH) and Public Safety (DPS), respectively;
• $200,000 for the coordination of community-based drug abatement and mobilization efforts;
• $190,000 for the Canine Drug Interdiction Program;
• $170,000 for the treatment of paroled drug offenders under the jurisdiction of the Hawaii Paroling Authority under section 353-66, HRS; and
• $125,000 as a grant-in-aid to each county to fund grassroots community efforts to sustain their anti-drug campaigns.

Your Committee has supported the efforts of the Legislature to refine and improve the Hawaii Rx Program (Program), renamed the Hawaii Rx Plus Program (Rx Plus) in H.B. No. 2005, H.D. 1. Rx Plus employs the purchasing power of consumers to negotiate lower prices and rebate agreements from pharmaceutical companies for residents who lack drug coverage under Medicaid or other government or private programs.

In 2002, Hawaii passed groundbreaking prescription drug legislation to establish the Program and provide Hawaii's citizens access to medically necessary prescription drugs at the lowest possible prices. The Program creates a state purchasing pool and encourages drug manufacturers to offer lower prices by leveraging Medicaid-based pharmacy expenditures. The State negotiates a rebate agreement with drug manufacturers allowing discounted drug prices for Program members.

Under the revised law, Rx Plus will provide drug coverage for people with incomes up to 350 percent of the federal poverty level, approximately $74,500 for a family of four, or $36,000 for a single person. Eligible Hawaii residents would apply for a Hawaii Rx Plus card and use it to qualify for reduced drug prices between 10 and 60 percent below the retail price at their local participating pharmacy.

Your Committee has put the people of Hawaii first. Whether it is on the issue of education reform, ice use abatement, or affordable prescription drugs, your Committee has taken immediate action to address the issues important to Hawaii's people.

This year, the Administration laid out four principles to abide by in developing its budget:

• The State must learn to live within its means;
• The budget should have structural balance where recurring expenses are matched with recurring revenues;

• The budget should adhere to sound budgeting principles and its reporting format should be clear and simple; and
• Adequate reserves should be maintained to even out fluctuations in revenues and expenditures and help preserve fiscal stability.

Your Committee has always used such principles in developing recommendations for the budgets of the Executive Branch, the Judicial Branch, the Legislative Branch, and the Office of Hawaiian Affairs. The economic chaos that ensued following the events of September 11, 2001, made the application of some of these principles difficult. Over the past two and a half years, however, tough fiscal decisions made by the prior Administration and the Legislature have put the State back on solid footing and on target to align all budgets with these sound budgeting principles.

Unfortunately, the budget and financial plan submitted by the current Administration appears to be heading in the opposite direction. The budget and financial plan submitted by the Administration on December 22, 2003, clearly indicates that expenditures will outpace revenues, peaking at a deficit of over $80 million in Fiscal Year (FY) 2006.

Despite the promotion of the principles of sound budgeting by the Administration, your Committee notes that:

• Much of the Administration's request for $120 million in new recurring expenditures was based on one-time savings attributable to debt service payments and an adjustment to the payroll remittance law requiring employers to submit taxes earlier, resulting in a one-time boost to the general fund of about $80 million;
• Large general fund revenue adjustments, to the tune of $99.8 million over two years, were made by the Administration, but not endorsed by the nonpartisan Council on Revenues. These assumptions were not revealed to the Legislature

• Despite submitting and advocating for legislation that could guarantee collective bargaining awards of 1.5 percent on an annual basis, the Administration's financial plan did not provide for any collective bargaining increases.

Your Committee notes that the financial plan submitted by the Governor in December called for an ending balance of $11.0 million in FY 2006. In addition, the financial plan did not include any assumption for potential collective bargaining increases, despite the Administration sponsoring legislation that could have guaranteed collective bargaining awards of at least 1.5 percent on an annual basis. Finally, the Governor withheld details concerning $99.8 million in revenue proposals for a full month after the statutorily required deadline for submitting the budget. These three factors undermine the ability of the Legislature and the general public to fully evaluate the budget proposal of the Administration to determine whether it meets the constitutional requirement to be balanced. Your Committee hopes that this practice will not be repeated in the future as it impairs transparency and accountability in developing a balanced budget.

Despite the Administration’s shortcomings in adhering to its stated budget principles, your Committee has used these principles to guide deliberations and decisions on this budget. Your Committee remains committed to continue working with the Administration to ensure that the departments’ budgets are adjusted using the best information available and, to the extent possible, that they adhere to the four budgeting principles.

Your Committee also notes that the Administration’s inexperience with the budget extends beyond its 2004 supplemental submittal to include its execution of the General Appropriations Act of 2003.

On June 23, 2003, the Governor announced that, "the State will not have enough resources to finance expenditures authorized by the 2003 Legislature for fiscal year 2004, much less for fiscal year 2005, the second year of the biennium." As a result, the Governor imposed a 20 percent across-the-board restriction on first quarter spending for all State agencies. In addition, in anticipation of economic fallout caused by the war with Iraq, the Governor announced on April 1, 2003, that the spending moratorium imposed on motor vehicles, training, purchases of furniture and equipment, and consultant contracts, would be continued. On June 30, 2003, the fiscal year ended with a general fund ending cash balance of $117.2 million. Despite the Governor’s initial claim that the budget authorized by the Legislature was unbalanced, by September 15, 2003, the Governor rescinded her spending moratorium and notified all departments that, "no statewide restrictions on funding will be extended nor imposed on full-year fiscal year 2004 departmental allocations at this time."

Your Committee is very relieved that the impact of the war with Iraq was not as long or as deep as was initially anticipated and is grateful that, in the end, the Governor decided not to cut spending for our public schools by 20 percent. As a result of the Governor’s September 15, 2003, Executive Memorandum, all State programs were authorized to expend all general funds authorized by the Legislature in the General Appropriations Act of 2003. The only control over spending currently being utilized by the Administration is a hiring approval process for a limited number of positions.

In January, your Committee held 28 public briefings to hear from leading economists, the Council on Revenues, the Counties, the Judiciary, and each of the Executive Branch departments. These briefings provided the foundation for your Committee's review of this Executive Supplemental Budget.

At these briefings, department directors provided summaries of the Administration’s proposed changes for each department. The directors were also encouraged to provide information on the actions taken to realize savings. Your Committee found that:

• No actions had been taken for which budget reductions could be realized by the vast majority of the departments; and
• The Governor’s hiring freeze, which had been in effect for over a year, had an adverse impact on the departmental operations of only four State departments: The DOH, Department of Education (DOE), Department of Land and Natural Resources (DLNR), and Department of Taxation (DOTAX). The other departments reported no adverse impact from the hiring freeze on their operations.

Your Committee has invited suggestions to identify revenue enhancement measures and expenditure reduction proposals. On February 9, 2004, all House members were invited to contribute suggestions that would ultimately aid in the passage of a balanced budget. Several of the suggestions have been incorporated into this Executive Supplemental Budget, but your Committee is still open to, and awaiting additional suggestions.

It is imperative that budget and financial plan related information be received on a timely basis to achieve the goals of government transparency and accountability. Unfortunately, there has been a lack of response from many departments to budget provisos in the General Appropriations Act of 2003. Your Committee has also been experiencing difficulties with obtaining timely responses to requests for information from several agencies.

In particular, the Department of Human Services (DHS) has not provided the Legislature with a single report, despite eight provisos requesting information that were in the General Appropriations Act of 2003. The information requested includes chore payments, prescription drug costs, and child out-of-home payments, which are all areas of fiscal concern this legislative session. Your Committee has not received responses to other requests for information as well.

Despite grave concerns about this lack of information, your Committee has done its best to make prudent decisions to appropriate additional funding for DHS, and hopes that existing barriers to transparency and accountability will be addressed by the time your Committee receives the budget from the Senate in preparation for the Conference portion of the legislative session.

Another department that has demonstrated a pattern of unresponsiveness to requests for information is the Department of Labor and Industrial Relations (DLIR). Although requests for information were sent to DLIR on January 20, 2004, and February 4, 2004, your Committee just received a response on March 4, 2004, a month after the second request for information was made. The response arrived before budgetary decisions were finalized, but the delay of information and subsequent lack of time to review and analyze the information left your Committee no choice but to deny DLIR 's request for additional positions in its administrative division.

Your Committee will continue to review the information from DLIR in preparation for decision-making during the Conference process. However, your Committee hopes that this lack of cooperation from DLIR is not a harbinger of further attempts to withhold information from the Legislature.

Your Committee would note that it is quite satisfied with the information received from many other departments.

The current Administration’s policy requires that:

• All requests for information be made in writing via email, fax, or memorandum to avoid confusion; and
• Policy questions must be directed to the respective director of the department by way of a memorandum from the Chair of your Committee.

Your Committee understands this policy in regards to clarity, but has concerns that limiting communications to written requests unnecessarily restricts the review and evaluation of the Administration’s proposed budget changes. An open and unrestricted dialogue is important to the pursuit of transparency and accountability in government and your Committee hopes that department policies will be modified to allow for this.

As in previous years, your Committee has made the difficult decisions that are necessary to balance the budget with available resources. These actions include:

Your Committee approves $104 million of the departments’ requests of a total of $120 million in additional general funds. These include many of the Governor’s priority program initiatives for education, the economy, environment, healthcare, and public safety. In addition, your Committee approves $306 million of the $308 million additional non-general funds proposed by the Administration.

Your Committee also appropriates funds for over 80 percent of the construction projects requested by the Administration, and provides the departments with more authority to implement additional capital improvement projects (CIPs) to provide better facilities for public use. Over 80 percent of the additional projects target:

• Improving the quality of our public school and UH facilities;
• Expanding the capacity of drug abuse treatment facilities; and
• Protecting and preserving agricultural lands for future use.

Your Committee has made major funding decisions to support the educational reform efforts contained in H.B. No. 2002, H.D. 2. Funding has been appropriated in this bill (H.B. No. 1800, H.D. 1) to support students in charter schools, increase student safety, meet statutory requirements to raise the pay of coaches, provide restroom supplies, adequately fund student transportation services, and support the A+ After-School Program. Additional federal funds have been appropriated to meet the requirements of the No Child Left Behind Act (NCLB) and the Individuals with Disabilities Education Act (IDEA). More specifically, your Committee:

• Provides an additional $2,262,614 for charter schools;
• Establishes 15 additional school security attendant positions;
• Provides an additional $500,000 for coaches’ salaries;
• Provides $1,000,000 for restroom supplies for school restrooms statewide;
• Increases student transportation funds by $2,500,000 to meet the costs of increased ridership and operational expenses;
• Provides an additional $3,464,418 for the A+ After-School Program for services for the entire school year; and
• Appropriates federal funds for programs required under NCLB ($8,914,664) and IDEA ($3,464,418).

Your Committee also provides $1,000,000 for additional library books and materials to be purchased for the 51 statewide public libraries.

While your Committee has been able to increase funding for public education and public libraries by $10.9 million in general funds and $12 million in federal funds in this bill, and increase funding for public schools by $8.3 million in H.B. No. 2002, H.D. 2, there are still many unmet educational needs. The Board of Education (BOE) had requested that the Governor include requests for $51 million in the Executive Supplemental Budget, of which only $3.7 million was approved by the Governor for inclusion in her budget request. With the financial limitations discussed elsewhere in this committee report, your Committee has been unable to meet all the needs identified by the BOE.

For reform to work and student achievement to improve, the Governor and the Legislature will have to address the needs of individual schools and find new and creative ways to meet them. Your Committee believes that an excellent public education system, where parents and communities are engaged with the school, teachers are of the highest quality, principals are effective leaders, and students are high achievers, cannot exist without proper funding.

Your Committee’s funding decisions for DOH were heavily influenced by the need to meet the federal court requirements that direct the State to implement the Plan for Community Mental Health Services (Plan). The Plan was adopted as an order by the United States District Court in January 2003, and requires the State to provide community-based services to individuals discharged, transferred, or diverted from the Hawaii State Hospital (HSH), as well as those at risk of hospitalization at HSH. The 2002 Hawaii

State Hospital Remedial Plan for Compliance (HSH Plan) also had an impact on your Committee's funding decisions concerning the Adult Mental Health Division.

Your Committee appropriates $18.4 million in additional general funds to support the implementation of the Plan and HSH Plan. $14,473,455 is appropriated for purchase of service contracts and to support Community Mental Health Centers statewide. In addition, $4,036,902 is appropriated for the purchase of service contract with Kahi Mohala to address overcrowding issues at HSH. The additional funds will increase the number of beds available for individuals in need of inpatient mental health services.

Your Committee believes that all individuals should have access to comprehensive primary healthcare services. Therefore, an additional $2,695,560 is appropriated to provide healthcare services for uninsured individuals and families throughout the state. The additional funds will allow up to 46,200 uninsured clinical visits and 6,871 uninsured dental visits to be provided in FY 2005. These funds will be distributed among 16 health facilities located throughout the state.

The Title XIX Home and Community-Based Waiver Services Program provides a variety of services to support developmentally disabled individuals in the community. The $2,750,820 in state funds appropriated by your Committee will be matched by federal funds to provide developmentally disabled individuals with services such as personal assistance, habilitation-supported employment, adult day health, respite, and skilled nursing.

Since its establishment in 1996, the Hawaii Health Systems Corporation (HHSC) has faced many well-documented challenges. Despite these challenges, HHSC has made significant improvements in providing healthcare services to the indigent, underinsured, and uninsured. Through its 12 community hospitals, HHSC provides long-term, rural health, and primary acute care to all who require medical assistance. Although it has made positive strides, HHSC continues to rely on state funding to subsidize its cash flow shortfall.

While your Committee fully supports the need to fund the healthcare services provided by HHSC, it has concerns regarding HHSC’s FY 2005 supplemental budget requests and justifications for a $31.2 million general fund operating subsidy. In addition to the $31.2 million in general funds, HHSC is requesting a special fund ceiling increase of $42.2 million. HHSC testified that it has made significant improvements in its operations through improved collections, implementation of cost-cutting programs, and other methods. HHSC states it has saved money for the State. At the same time, HHSC requests additional funds and attributes its cash flow shortfall to issues including collective bargaining, payment contributions to the Employees’ Retirement System, ineligibility for Disproportionate Share Hospital payments from

Medicaid, and the loss of a malpractice insurer. Your Committee finds it perplexing that HHSC touts its cost-savings efficiencies at certain times while decrying its lack of resources at others.

As in the past, HHSC’s budget requests and justifications for funding offered neither specifics nor a basis for its funding requests. Despite discussions with representatives from HHSC and B&F, your Committee has received no rational explanation as to how the 31.2 million general fund subsidy request was determined. Furthermore, HHSC’s chief financial officer and accountant also failed to provide a reasonable explanation for this funding request.

In an effort to properly and responsibly evaluate HHSC’s supplemental budget request and determine an adequate level of funding, your Committee utilized the Uniform Cash Analysis (UCA) method as its primary means of analyzing HHSC’s cash flow. This method of analyzing cash flow is the standard used by financial institutions to determine a company’s repayment ability. Accordingly, in the case of HHSC, the cash flow analysis provided a means of analyzing its actual cash flow shortfall.

Based on a UCA cash flow analysis using HHSC’s audited financial statements prepared by Deloitte and Touche for FYs 2002 and 2003, your Committee has determined that $20 million is an adequate level of funding. In arriving at this figure, your Committee considered HHSC's projected beginning cash balance of $15.3 million for FY 2005. In previous years, HHSC showed beginning cash balances of $11.9 million for FY 2002, $6.9 million for FY 2003, and $15.2 million for FY 2004. Your Committee is

confident that $20 million in general funds, plus a ceiling increase of $65 million in special funds, based on previous years in which HHSC's expenditure ceiling was exceeded, is sufficient to cover and support HHSC’s projected cash flow shortfall for FY 2005.

Your Committee shares DLNR's concerns regarding the entry of invasive species into our State. In response to the threats of invasive species, the 2003 Legislature established the Hawaii Invasive Species Council (HISC). To assist HISC in protecting against these threats to Hawaii's economy, natural environment, and to the health and lifestyle of Hawaii's people, your Committee provides appropriations in the total sum of $5,000,000 for FY 2005, subject to a one-to-one, nonstate matching of funds or services. The amount combines a general fund appropriation of $4,000,000, and an appropriation from the Natural Area Reserve Fund of $1,000,000.

The similarity in the amount of funding by your Committee, although by a different funding mechanism, and the Administration's initial request of $5,000,000 in general funds, reflects your Committee's intent to be prudent in adopting many of the Administration’s budget requests. The difference in the source of the appropriation demonstrates the flexible manner in which your Committee provides resources during times of fiscal limitations. Your Committee has also included a proviso which includes among its requirements, a request that DLNR report to the Legislature prior to the convening of the 2005 legislative session to allow the Legislature to complete its review of the efficacy of HISC.

Your Committee is acutely aware of the many challenges faced by DPS to mitigate overcrowding in our prisons and rehabilitate inmates before their release back into our communities. Reducing overcrowding and providing substance abuse treatment and sex offender treatment to inmates and parolees is also of utmost importance to your Committee.

Your Committee authorizes $5,947,981 for the transfer of additional inmates to out-of-state facilities and to the Federal Detention Center on Oahu. Funding for increases in the basic daily costs for inmates already housed at out-of-state facilities and at the Federal Detention Center in the amount of $2,054,858 is also approved.

Additional funding of $340,000 is approved for substance abuse treatment. Your Committee notes that $100,000 in additional resources for sex offender treatment, which a sex offender must complete to gain eligibility for parole, is also authorized. In its final report, the Ice Task Force described not only the necessity but also the effectiveness of substance abuse treatment in counteracting crystal methamphetamine addiction.

Dedicated to quality higher education, your Committee recognizes UH as an important component in transforming and diversifying the State’s economy. Your Committee believes the University will play a vital role in the current and future economic health of Hawaii and appropriates the necessary funds to achieve this goal.

Your Committee appropriates funds to hire staff and operate the University’s new John A. Burns School of Medicine and Health Sciences Library located in Kakaako. This new campus will include an education/administration building to house faculty and staff offices, classrooms, a patient simulation center, a lecture hall, and the University Health Sciences Library. The new campus will also be the location of the biomedical research building with state-of-the-art research laboratories to attract research funding and grants.

Furthermore, your Committee provides funding to establish a creative media program. The creation of the Academy of Creative Media will help to establish the University’s film school and generate a new source of revenue for the State from the film and television industries.

Finally, to help meet the demand for construction workers for the current and projected construction boom in Hawaii as well as to create a pool of new apprentices for the Pearl Harbor Naval Shipyard, your Committee appropriates funds to support and expand the apprenticeship training program offered at the community colleges. The apprenticeship program will be vital in producing trained construction workers and apprentices who can meet future demand.

Last session, in an attempt to bolster the economy and address needs for new and improved facilities, the new Administration proposed a construction plan calling for an additional $554 million in new general obligation bond funded construction spending for FB 2003-2005. Given the substantial uncertainties created by geopolitical events such as the war in Iraq and concerns over the resiliency of the local economy, your Committee took a fiscally conservative approach and reduced that amount to approximately $404 million. However, with the passage of time and the dissipation of much of last year's uncertainties, your Committee has reconsidered the Administration’s proposal by including an additional $215 million to provide for new general obligation bond funded capital expenditures requested by the Administration. The low interest rates and availability of federal matching funds makes this the ideal time to move forward on these public construction projects. At the same time, your Committee found it appropriate and fiscally prudent to withhold funding for projects totaling approximately $43 million that either lacked justification or can be financed using alternate means.

The majority of new capital expenditures approved by your Committee is to be directly invested in the State's educational infrastructure. Your Committee approves an additional $155 million to be deposited into the State Educational Facilities Improvement Special Fund to construct new school facilities, modernize classrooms, and address health and safety concerns.

To enhance higher education in this State, $25 million is added to modernize facilities and address health and safety concerns at all UH campuses. In addition, your Committee approves nearly $91 million for the development of facilities at the community colleges and UH-Hilo.

Acknowledging the community outcry to address Hawaii's drug abuse problem, your Committee appropriates $10 million to expand the capacity of drug abuse treatment facilities. This increased capacity will enable the Administration to better provide needed services to those in the community who are at risk.

At the beginning of 2004, the Department of Business, Economic Development, and Tourism (DBEDT) reported that all of Hawaii's economic indicators were positive, investment in construction and real estate continued to provide strong support for growth, and the sector of the economy supported by tourism had been relatively solid in the face of continuing international uncertainty.

As the effect of recent distressing geopolitical events such as the war with Iraq and the SARS outbreak has subsided, it appears that Hawaii's economy has stabilized and is beginning to progress toward recovery. According to the latest figures from DBEDT, unemployment in the State fell to 3.9 percent in January, and the economy currently employs an all-time high of 603,200 people. Nominal personal income has risen by $1.9 billion, or 5 percent, and wages and salaries in the private sector grew roughly 6.0 percent. The number of bankruptcy filings has decreased, with 19.2 percent fewer filings in the third quarter of 2003.

The visitor industry, the major driver of the State's economy, has reason to be optimistic. As the continental U.S. economy continues to strengthen, Hawaii's domestic arrivals have remained strong, and compared to the same quarter in 2002, were up 4.4 percent in the third quarter of 2003. During the same period, hotel occupancy rates increased by 5 percent. However, the total number of visitors arriving by air increased by only 0.6 percent, indicative of a 7.8 percent decrease in the number of international arrivals.

Factors are pointing to a recovery in the international stock markets. Indicators reveal that the corporate restructuring and governmental reforms of its banking sector are allowing Japan to emerge from its decade-long economic stagnation. In the fourth quarter of 2003, Japan's economy expanded by 1.7 percent, its fastest growth rate in 13 years. As bad bank loans have been cleared out, investments in the securities markets have increased, allowing the benchmark Nikkei Stock Average to recently hit its highest close in 20 months. Despite the decrease in international arrivals, the State has benefited from the strength of the yen relative to the dollar, as Japanese visitor spending has increased with increases in the purchasing power of their currency.

Although economic indicators are optimistic, your Committee recognizes the continued existence of risks in the geopolitical environment that could distress the economy at a moment's notice. The situation in Iraq remains unstable, North Korea has continued its provocative statements regarding nuclear armament, and the threat of terrorism is very real. These factors could disrupt the global economy and affect the leisure travel that currently drives Hawaii's economy.

Despite the positive economic outlook, your Committee is also concerned about the future impact of the diminished purchasing power of Hawaii's citizens. According to the Federal Bureau of Labor Statistics, the rate of inflation in Hawaii has risen 2.9 percent, exceeding the national average of 2.0 percent. Recently,

the median price for a single-family home on Oahu rose to a record $410,000. Gasoline prices have hovered around $2 a gallon, 19.4 percent higher than in the second half of 2002.

Your Committee believes that the signs of economic recovery are a reflection of prudent steps taken by the Legislature in recent years that have set the stage for a vibrant, diversified economy. Efforts to maintain tax reductions, protect our consumers, and continue to streamline government remain critical to stimulating our economy.

On January 6, 2004, the Chair of the Council on Revenues (Council) presented the Council's December 22, 2003, projection to your Committee. The presentation, which focused on current economic and tax revenue trends and on the forecast for the State's general fund tax revenues, included the following reports:

• FY 2003-2004 ended with a 4.4 percent increase in State general fund tax revenues. The Council attributed the increase to fairly strong economic growth that offset a decline in individual and corporate income taxes, resulting in a solid increase in general excise tax receipts.
• The general fund tax revenue growth rate forecast for FY 2004-2005 was revised from 6.2 percent to 5.2 percent in December 2003, based on the Council's review of tax revenue growth trends.
• The general fund tax revenues forecast for FY 2005-2006 and beyond remained unchanged.
• The Council found that the factors driving Hawaii’s economy, such as visitor arrivals, construction, real estate activity, and consumer spending, all appear to be very strong and that the outlook for revenue growth remained high. The Council forecasted:

Hundreds of millions of dollars of construction projects on Oahu are currently on hold due to unsuccessful contract negotiations between the management and employees of Ameron Hawaii and Hawaiian Cement. The impact of this impasse will undoubtedly be felt statewide. Although initial analysis by economists indicated that the impact of the cement strike would be minimal due to optimism that the construction industry would be able to redouble its efforts and make up for lost time, a prolonged strike diminishes the likelihood of this outcome.

Ultimately it will be up to the Council to reevaluate revenue projections in light of the strike, and if necessary, adjust revenue projections accordingly. Your Committee is prepared to work with the Administration and the Senate to create a balanced budget if projections are reduced.

A company’s most vital asset is its work force, and your Committee recognizes the important role of public workers in state government. However, concerns remain about the budget adjustments that will be required to fully fund future collective bargaining contracts. Both your Committee and the Administration recognize that fair compensation is critical to attract qualified employees and retain and maintain the morale of existing public servants.

Several options were reviewed to address funding requirements for employee pay raises. Both your Committee and the Administration understand the need to responsibly plan for and prepare to adjust the State’s financial plan so as to minimize impacts on critical public services. Your Committee will be waiting for proposals from the Administration when the contracts for employee compensation are finalized. Your Committee requests

that the Administration develop its proposals in a timely and open manner to allow for legislative and public consideration of possible impacts on the delivery of public services.

This measure allocates limited available resources to areas of the highest priority, namely education reform, ice abatement, and affordable prescription drugs, while it recognizes the fiscal constraints and uncertainties of the future. This budget not only meets the State's financial obligations and social responsibilities, but is balanced as required by the Hawaii State Constitution and HRS. Your Committee realizes that there is still much work to be done before the end of the 2004 legislative session, and is prepared to work with the Administration and Senate with a steadfast commitment to produce an equitable and balanced budget.

As affirmed by the record of votes of the members of your Committee on Finance that is attached to this report, your Committee is in accord with the intent and purpose of H.B. No. 1800, as amended herein, and recommends that it pass Second Reading in the form attached hereto as H.B. No. 1800, H.D. 1, and be placed on the calendar for Third Reading.