Honorable Calvin K.Y. Say

Speaker, House of Representatives

Twenty-Third State Legislature

Regular Session of 2005

State of Hawaii

Sir:

Your Committee on Finance, to which was referred H.B. No. 100 entitled:

begs leave to report as follows:

The purpose of this bill is to appropriate funds for the operating and capital improvement costs of the Executive Branch for the fiscal biennium of July 1, 2005, through June 30, 2007.

Your Committee has labored to craft a balanced budget that is responsive to the needs and demands of our communities, focusing primarily on improving the quality of life for every community. Inherent in this approach is the need to be mindful of the many interrelationships at play, interrelationships such as that between the State and the federal government, and how what happens, or is anticipated to happen, at the federal level, impacts the State’s role in providing services. This approach also recognizes the pressing needs of our communities, particularly in the areas of education and controlling the crystal methamphetamine or ice epidemic, needs that are not addressed by the Governor's Executive Budget request. As amended by your Committee, this budget:

• Continues to support education system reform efforts initiated by Act 51, Session Laws of Hawaii (SLH) 2004;

• Continues efforts to stem the ice epidemic by providing the resources needed to meet the objectives established by Act 40, SLH 2004;

• Supports the needs of the University of Hawaii system;

• Assists the counties by providing money to maintain their roads; and

• Honors the sacrifices being made by the men and women of the Hawaii National Guard.

Your Committee has worked with the communities, solicited and received input on their needs, and produced this budget to ensure that the State responds to each of these priority areas. In meeting these needs, your Committee balanced the budget without increasing taxes.

Despite strong economic indicators for Hawaii, and the Council on Revenues’ positive revenue projections, your Committee, as in previous years, continues to take a prudent and fiscally responsible approach to balancing competing demands for resources in the development of this Executive Biennium Budget.

Public expectations are high, but we must remain vigilant and scrutinize how taxpayer dollars are spent. The structural changes made to the tax system, budgeting policies, and priorities adhered to in prior years by the Legislature continue to strengthen the State's economy. Your Committee has consistently approached the preparation of the budget with the recognition that government cannot be all things to all people.

A Honolulu Advertiser editorial on January 25, 2005, acknowledged those efforts when commenting on Governor Linda Lingle's State-of-the-State address. The newspaper noted that:

Your Committee is pleased that Hawaii is experiencing a vibrant economy and the general outlook is upbeat. However, despite this favorable outlook, there are impending gaps in the federal budget as developed and submitted by President George W. Bush-–gaps that will impose larger unfunded mandates on all states in the near future. Your Committee has discovered that these gaps are mirrored in the state budget proposed by the Governor, and has worked to try to fill these "pukas" in the best way possible.

Although economic indicators in Hawaii suggest strong economic growth, actions taken and proposed by the President and the Congressional Majority cannot be ignored. Large tax cuts for the wealthiest citizens, combined with mounting costs of the war in Iraq, have left potentially large unfunded federal mandates for states to absorb on their own. These changes will have immediate impact and long-term consequences that will be devastating to state budgets across the nation.

The nonpartisan National Conference of State Legislatures' (NCSL) publication, Federal Budget and Revenue Update, issued on February 8, 2005, summarized the federal budget submitted by President Bush. It found that President Bush's budget:

• Proposes more than 150 program reductions and eliminations in non-defense discretionary programs, one-third of which are education programs, saving the federal government approximately $20,000,000,000.

• Proposes to consolidate a number of programs, which in most cases, will provide states with additional flexibility but less funds.

• Proposes an additional set of reforms in mandatory programs, saving approximately $137,000,000,000 over the next 10 years. This includes a proposal to curtail intergovernmental transfers and other financing mechanisms under Medicaid.

NCSL News provided an updated analysis of the President's budget on February 15, 2005, and noted that the President's budget "as proposed would merely export the federal deficit to the states."

Last year, NCSL identified at least $29,000,000,000 worth of cost shifts that require state expenditures for federally mandated programs. Many of those cost shifts continue to be underfunded in the recent budget proposal:

• The Individuals with Disabilities Education Act (IDEA) continues to be funded at only a fraction of what it costs states to implement the programs. The proposed budget would fund IDEA at 19 percent of the per-pupil costs, despite a long-standing promise from Washington that the federal government would cover 40 percent of the per-pupil costs of the program.

• Proposed funding for the national Administration's cornerstone education policy, No Child Left Behind Act (NCLB), continues the Administration's failure to provide adequate funding for the program. Funding for NCLB would increase by less than $1,000,000,000 under the proposed budget, an increase of less than 0.2 percent of the K-12 budget in the United States.

• The Help America Vote Act, enacted by Congress and signed by the President in response to the voting irregularities associated with the 2000 presidential election, is not funded under the current budget proposal, which leaves a funding gap between the amount Congress has authorized and the amount states have actually received for implementation.

• The Food Stamp Program would be cut by $57,000,000 if a legislative initiative included in the budget proposal is enacted. The bill would limit the eligibility of food stamp recipients to those who participate in the Temporary Assistance for Needy Families and Supplemental Security Income programs.

In Hawaii, the implementation of the QUEST program nearly a decade ago helped mitigate the severe Medicaid program shortfalls faced by other states. Your Committee is mindful that the State will need to do even more to prepare for the shortfalls that will develop if the President's budget is approved. According to NCSL analysis:

In addition, the President's budget does not include funds for ongoing military operations in Iraq, enacting Social Security reforms, or for extending or making federal tax cuts permanent. These are all part of the President’s agenda that will have a severe budgetary impact, if adopted by Congress.

Significant weaknesses exist in the budget that President Bush has submitted to the Congress of the United States of America. Those weaknesses, reductions, and cuts will undoubtedly result in unfunded mandates to all the states, including Hawaii.

The biennium budget submitted by the Governor increases government spending by over $1,100,000,000 over the next two years. Allowing for fixed costs, the Governor's budget increases government spending by over $200,000,000 in the next two years. According to the budget documents submitted by the Governor:

As the details of the Governor's budget were analyzed, numerous weaknesses and pukas were discovered. It became apparent that the Governor's budget, while trying to be all things to all people, may have neglected important needs in our communities. These needs are in areas not generally categorized as newsworthy, but which are the very areas that directly affect the quality of life of the individuals and families in our communities.

The budget, like all bills, must go through the legislative process. While the House draft represents a milestone, it is not the final version of the budget, but merely a step in the process. Your Committee hopes that these pukas in the budget can be highlighted and discussed before they become lost in the coming days as other concerns, such as the March Council on Revenues’ projection, and the various collective bargaining issues, occupy the attention of the general public.

Like any other piece of legislation, different people have different priorities. Your Committee has changed the focus of the budget from that of the Governor. After listening to the community, your Committee agrees, in part, with the priorities of the Governor. Unfortunately, deeper analysis of the Governor's recommendations revealed serious weaknesses. As much as your Committee would like to commit resources to many of the initiatives endorsed by the Governor, your Committee must look to the future.

Economic momentum cannot be sustained without investment in the basics. There is one area of investment in our grandparents' and parents' generations that continues to be a driving force in improving the quality of life for our generation and for our childrens' generation. That area of investment is education – both lower and higher levels of education.

In addition, your Committee is committed to continue the battle against ice and has appropriated funds that were already included in Act 40, SLH 2004, but were not made a part of the Governor’s budget submittal. Ice has terrible impacts on the drug addict and society as a whole, and it would appear that this battle is far from over. Not following through and sustaining present funding to combat this epidemic, places the quality of life of our communities at risk.

In October 2004, the Board of Education (BOE) approved a biennium budget of an additional $102,735,777 ($45,214,550 in fiscal year (FY) 2005-2006 and $57,521,227 in FY 2006-2007) to address key public school programs. The Governor reviewed the BOE’s budget and submitted a revised biennium budget of $23,553,505 ($11,019,669 in FY 2005-2006 and $12,533,836 in FY 2006-2007), leaving many holes, or pukas, of underfunded and unfunded public education needs that total $79,182,272 over the fiscal biennium. According to a March 2005, update from the Department of Education (DOE) Superintendent, the Governor's proposed budget is $82,100,000 short of DOE's needs.

The School Food Services Program provides many essential services, which include supplying breakfast and lunch to public school students, helping to meet the nutritional needs of a limited number of children in child care centers, providing daily lunches to the elderly feeding program, and providing meal services to other state and local agencies.

In fiscal biennium (FB) 2003-2005, the Legislature agreed with the current Administration to reduce general fund appropriations to the School Food Services Program with the understanding that these funds would ultimately need to be restored. Inquiries during FB 2003-2005 revealed that balances had accumulated in special and federal funds which the School Food Services Program could use in lieu of general funds. However, those funds will be depleted by the end of this current fiscal year, and BOE has requested $10,650,325 in each year of the fiscal biennium to offset these depleted funds. In spite of this, the Governor only approved $5,000,000 for each fiscal year, addressing less than half of the School Food Services Program’s needs, still leaving a shortfall of $5,650,325 for each year of the fiscal biennium.

To magnify this shortfall, recalculations have been done and indicate an even greater need. The contracted costs of milk and food have increased due to a rise in shipping costs, and it appears that the projected shortfall in funds for the School Food Services Program will actually be about $18,000,000 in FB 2005-2007. DOE's plans to increase lunch prices, while helpful, will be insufficient to cover the shortfall. Without adequate program funds, children may no longer receive a quality subsidized lunch. A hungry child will not be able to focus on learning. To this end, your Committee has provided an additional $18,000,000 over the biennium to the School Food Services program to pay for the rising prices in food costs. The DOE assisted the State in balancing its budget during a time of need. Concomitantly, assisting the DOE in their time of need is simply the right thing to do.

Another issue of concern is student transportation. BOE has requested $2,572,958 in FY 2005-2006 and $3,194,943 in FY 2006-2007 in addition to its base budget of $25,769,384. However, these amounts were disapproved by the Governor and left out of the Administration’s submittal to the Legislature in December 2004. A more accurate update reveals that DOE needs $16,300,000 more to fulfill student transportation needs.

If the Student Transportation Services Program does not receive additional funding, it will be forced to cut or reduce services. A child must be able to travel to school in order to learn. To ensure adequate transportation services, your Committee has provided an additional $2,572,958 for FY 2005-2006 and $3,194,943 for FY 2006-2007.

Addressing autism spectrum disorder (ASD) has become a critical issue for DOE. Annually the number of children with autism is growing by approximately 10 to 17 percent nationwide, with the number in Hawaii growing by approximately 16 percent each year. Currently, 1,047 students have been diagnosed as having ASD statewide.

BOE requested $3,000,000 for each year of FB 2005-2007 to deal with ASD, and although the Governor approved this amount, further analysis revealed that additional funds are needed to support district efforts to fulfill Felix consent decree requirements for services for students with ASD. DOE also requires 59 additional special education teacher positions and 59 additional educational assistant positions, together with classroom supply funds for each teacher, to meet projected needs based on the staffing methodology and projected enrollment under the Felix consent decree. If these needs are taken into consideration, the Governor's budget is $18,700,000 short of funds for special education, and $10,600,000 short of funds for autistic children.

Without adequate funding, DOE will be unable to sustain services for special education students and will risk falling out of compliance with Felix consent decree requirements in various areas. As a result, there may be further litigation against the State, and the federal court oversight that is scheduled to be lifted in 2005 may be extended.

To address these serious concerns and to help DOE provide for our children’s special education needs, your Committee has appropriated an additional $4,800,000 for the biennium to provide the required additional staffing, and an additional $10,600,000 for FB 2005-2007 to help autistic children.

One of the fastest growing areas of public school reform is the charter schools movement. While providing choices for parents and students within the public school system, charter schools also encourage innovation and provide opportunities for parents to play a powerful role in shaping and supporting the education of their children. In Hawaii, there are 27 public charter schools which educate over 5,000 public school students and hire over 500 employees. From 2001 to 2004, there has been an increase in enrollment from 3,066 to 5,167 students, which is a 69 percent increase. Your Committee has recognized this increase by appropriating an additional $2,000,000 over the Governor’s biennium budget proposal to assist charter schools in educating their students as well as creating a system of financial accountability.

Despite your Committee’s efforts to fund all of the DOE’s shortfalls, there are still pukas within the budget that are not addressed and that will make it difficult for DOE to comply with the requirements of Act 51, SLH 2004, more commonly referred to as the Reinventing Education Act of 2004. DOE requires $10,600,000 in additional funds to convert school principals' contracts from ten-month to twelve-month contracts. Additional funds in the amount of $4,100,000 are needed for technology upgrades for all of its student information needs, special education, financial, and human resources data requirements. While your Committee was unable to find the resources to fund these particular needs, it is important to at least highlight them as areas to work on as the budget moves through the legislative process. In addition, the Interagency Working Group has worked hard and is close to identifying those people and responsibilities that must be added to DOE either through additional appropriations or transfers from other state departments.

Your Committee worked with DOE to determine how to fill the many pukas in the Governor's proposed biennium budget for public education. In summary, your Committee has appropriated an additional $41,167,901 in general funds over the fiscal biennium to address the five priority areas of food services, student transportation, ASD, special education teachers and educational assistants, and charter schools. Of this additional $41,167,901:

• $18,000,000 will relieve the shortfall in food services;

• $5,767,901 will help fund student transportation;

• $10,600,000 will address ASD needs;

• $4,800,000 will provide additional special education teachers and educational assistants; and

• $2,000,000 will help address charter schools’ needs.

Your Committee recognizes the continued work of the Joint House-Senate Task Force on Ice and Drug Abatement (Ice Task Force). Last session, the Legislature approved Act 40, SLH 2004, which provided a comprehensive plan to address the ice epidemic. The Legislature found that early intervention is the key to diverting adolescents away from drug use and that prevention of substance abuse is critical to ensure that ice addiction does not spread.

The Administration, although placing a priority on substance abuse treatment and prevention in its "A New Beginning for Hawaii" plan, has demonstrated that the continuation or implementation of such programs is not a priority by appropriating only $6,180,000 for substance abuse programs over the biennium. The full funding allotted in Act 40, was not included in the Administration's biennium budget.

Your Committee recognizes the importance of continuing the efforts of the Ice Task Force and Act 40, and recommends an additional $14,880,000 in funding (for a total of $21,060,000) towards substance abuse treatment and prevention over the biennium to maintain funding levels at those for the current year.

More than 9,000 public school students in grades 6 through 12 (approximately 11 percent) are estimated to need treatment for alcohol or drug abuse. Part of the core continuum of care for adolescents is early identification of substance abuse followed by treatment. School-based treatment is an efficient and effective way to intervene in a timely manner, allowing adolescents to become healthy and productive adults.

The Administration requested $720,000 to fund adolescent substance abuse treatment services in four public high schools. However, your Committee believes that it is imperative to provide treatment not only at the high school level, but at the middle school level as well. Your Committee, therefore, has appropriated $4,540,000 to provide substance abuse treatment services to 13 high schools and up to 15 middle schools. These funds will provide treatment in all of Hawaii’s public high schools, addressing the situation at a fundamental level.

Act 40 appropriated $8,000,000 for adult treatment services, including family counseling, with priority given to women of child-bearing age, pregnant women, parents of young children in the home, and Hawaiians. This funding is missing from the Administration’s budget, but has been restored by your Committee.

Your Committee finds that effective crime reduction depends in part upon the effectiveness of drug treatment programs and thus has appropriated $200,000 to fund two temporary positions in the Alcohol and Drug Abuse Division of the Department of Health (DOH) for a substance abuse treatment monitoring program. This monitoring program will help determine the effectiveness of substance abuse treatment services and maintain accurate numbers of individuals receiving publicly funded substance abuse treatment.

In addition to the funding provided through the DOH, your Committee has provided general fund grants to the four counties to continue the funding initially provided by Act 40. A total of $2,460,000 is appropriated to the counties to help with their anti-drug campaigns and community-based substance abuse prevention efforts.

Recognizing the deteriorating condition of our roads, your Committee has appropriated a total of $20,000,000 in subsidies to the various counties from the State Highway Fund. During the 2004 Regular Session, the Department of Transportation (DOT) projected that the State Highway Fund would collect $174,000,000 by the end of FY 2003-2004. However, at the end of FY 2003-2004, the State Highway Fund had actually collected $182,000,000 resulting in an unanticipated surplus of $8,000,000. In addition, by the end of this fiscal year, the State Highway Fund is projected to collect an additional $186,000,000 and have a balance of over $141,000,000. As such, there is more than enough money to provide these subsidies to the counties. The City and County of Honolulu would receive $4,000,000, while the other three counties would receive $2,000,000 each. Although these amounts are not sufficient to solve all of the county's road problems, it is appropriate to spend some of the moneys to assist in resolving the many concerns of the community with regards to the condition of Hawaii's roads, including potholes.

Your Committee is extremely grateful to members of the regular military, military reserves, and Hawaii National Guard and Reserves for their service to our nation. These men and women have bravely placed themselves in harm's way to preserve the freedoms that we cherish. It is essential to ensure that these troops enjoy the support of their state. Therefore, your Committee has appropriated $131,200 in FY 2005-2006 and $56,250 in FY 2006-2007 for repair services for the Hawaii State Veterans Cemetery to honor our troops and their sacrifice.

Your Committee has also allocated $200,000 in each year of the fiscal biennium to veterans' services, of which $100,000 will be used to provide care packages for Hawaii National Guard members deployed to foreign countries and $100,000 for appreciation benefits for our National Guard members when they return home from such deployment.

The Governor's proposed fiscal biennium budget included funds for:

• Sufficient staffing and equipment for new schools (Maui Lani and Ocean Pointe);

• The increasing number of children in public schools who suffer from ASD; and

• The impact of the incoming Stryker Brigade.

Although the Governor's budget addressed a variety of BOE's requests, it contained significant shortfalls in the main priorities set by BOE for the DOE.

While the economic and environmental impact of the incoming Stryker Brigade may be at the forefront of people’s minds, there is also an educational impact. Based on an environmental impact statement, DOE has projected that 760 additional students will be entering DOE’s school system in school year 2005-2006, a number on which the Administration based its budget.

However, further investigation into the impact of the Stryker Brigade has resulted in a revised estimate of 369, rather than 760 new DOE students. The Governor appropriated $8,411,314 in federal funds for the fiscal biennium based on the old estimate: $3,730,990 for FY 2005-2006 and $4,680,324 for FY 2006-2007. Your Committee has adjusted the federal fund numbers to reflect the needs of the DOE based on this new estimate and has appropriated $3,446,786 in federal funds for the fiscal biennium: $1,186,895 in FY 2005-2006 and $2,259,891 in FY 2006-2007.

Your Committee recognizes the importance of access to comprehensive primary health care throughout the State. Comprehensive primary health care services include but are not limited to outpatient care, inpatient care, emergency services and consulting specialty clinics.

The Administration, however, did not see fit to provide funding for comprehensive primary health care in every area that has been funded in the past. The Administration provided funding for the Hana district on the island of Maui, the island of Molokai, and the Ko'olauloa area on Oahu. However, it appears that the Waianae coast was forgotten in the Administration’s budget.

In ensuring that comprehensive health care is available to everyone throughout the state, particularly in areas of special need, it is critical to properly address all of these four geographic areas. Your Committee believes that each area should be funded and therefore appropriates $750,000 in general funds for each year of FB 2005-2007 to fill this puka in comprehensive primary health care for the Waianae area on the island of Oahu.

Your Committee's funding decisions for DOH were prioritized and influenced by the need to meet federal court requirements. The funding requests of the Adult Mental Health Division (AMHD) were driven by a settlement agreement with the United States Department of Justice regarding the conditions at Hawaii State Hospital (HSH). The agreed-upon plan for community and mental health services required the State to provide community-based services to individuals discharged, transferred, or diverted from HSH, as well as those at risk of hospitalization at HSH.

On December 10, 2004, HSH was released from federal oversight. The community portion of the case, scheduled to end in February 2005, was extended to June 30, 2006. Your Committee has appropriated funding for the biennium to ensure that HSH has adequate facilities and bed capacity, as well as adequate funding to complete and meet the federal court ordered community plan within the new deadline.

A total of $8,227,970 in general funds has been appropriated for AMHD inpatient and outpatient services:

• $996,960 for HSH to cover increasing patient drug costs and to implement an updated medication dispensing system;

• $3,369,458 for purchase of service contracts for individuals discharged, transferred, and diverted from HSH and those at risk of hospitalization; and

• $2,837,092 for Community Mental Health Centers statewide by providing staffing support and fiscal responsibility.

Title XIX Home and Community Based Waiver Services Program supports developmentally disabled individuals in the community by providing a variety of services. The funding requests of the Developmental Disabilities Division were driven by federal court decisions as well as state settlement agreements. In December 1998, the Hawaii Disability Rights Center (HDRC) filed a "waiting list" lawsuit against the State. In 2000, the HDRC and the State reached the Makin Settlement Agreement, which requires the State:

In 1999, the Olmstead Supreme Court decision mandated that individuals with disabilities be given choices about where they live and receive services. This, coupled with rising patient costs and increased admittance, led to a major financial shortage. To uphold the requirements of the state settlement and federal mandates, $15,714,099 in additional state general funds, to be matched by federal funds, has been appropriated by your Committee to provide services to individuals with developmental disabilities.

On September 10, 2004, the UH Board of Regents approved a biennium budget of $70,000,000 ($31,000,000 in FY 2005-2006 and $39,000,000 in FY 2006-2007) focusing on four themes: native Hawaiian initiatives, workforce development, enrollment demands, and infrastructure and challenged underfunded areas. The Governor reviewed the Board of Regents’ budget and submitted a revised biennium budget of $25,000,000 ($10,000,000 in FY 2005-2006 and $15,000,000 in FY 2006-2007). These amounts were reflected as lump sums in the administration portion of the UH system (UOH 900). Your Committee finds that the State Administration’s lump sum budgeting of UH under the guise of autonomy does a disservice to the people of Hawaii. Autonomy at the price of transparency serves no one: neither the students, nor faculty, nor the general public. There must be accountability for the use of taxpayer money.

In addition to the lump sum budgeting, UH's administration was unable to provide information regarding the priority of its requests in relation to the revised biennium budget submitted by the Governor. It was thus unclear to your Committee as to which requests were most important should funding not be fully available. Therefore, your Committee worked closely with your Committee on Higher Education to define priority areas of funding for the University system.

Your Committee finds that top priority should be the actual colleges themselves rather than administrative, system-wide support, as requested in the Governor’s budget submittal. Over the last few years, the individual campuses have suffered major budget shortfalls that have greatly impacted their ability to respond to enrollment demands, changing technologies, and a backlog of repair and maintenance needs. Therefore, your Committee has provided a total of $23,603,682 to the UH system over the biennium. Of this amount, $7,900,000 was allocated to the community colleges, $5,300,000 to UH at Hilo, and $9,000,000 in non-recurring costs to the new John A. Burns School of Medicine facility in Kakaako.

Providing access to quality post-secondary education for the residents of Hawaii continues to be the single most important mission of the community colleges of the UH system. Your Committee recognizes the important role that community colleges play in preparing students for entry-level employment, upgrading current levels of proficiency, and developing and strengthening basic skills. To accomplish this mission, additional funds are necessary to enable the community colleges to maintain, expand, and enhance opportunities for individuals to enroll at moderate cost in liberal arts and career and technical education programs close to where they live and work. As such, your Committee has appropriated a total of $7,900,000 over the biennium for the community colleges to:

• Expand existing programs geared towards workforce development;
• Strengthen Hawaiian Studies programs;
• Implement two new four-year baccalaureate programs at Maui and Honolulu Community Colleges;
• Improve and expand opportunities for students needing remedial and developmental instruction in the areas of English and math;
• Replace equipment to provide a first-class information technology infrastructure for instructional programs, distance education, and teleconferencing; and
• Increase campus security for the safety and well-being of students, faculty, staff, and campus patrons.

UH at Hilo (UH-Hilo) is recognized nationally as a public university with a rigorous and engaging curriculum and one of the country’s most diverse student bodies. Located on the Big Island of Hawaii, UH-Hilo offers its students and faculty natural laboratories for learning and research that include distinctive climate zones and ecosystems that cannot be found anywhere else in the world. UH-Hilo is also actively engaged with the community outside the university, as its research and scholarships directly benefit the people and economy of the island of Hawaii and the state as a whole. Despite its strengths and achievements, your Committee recognizes that much still remains to be done. As UH-Hilo continues to grow, new facilities, programs, additional personnel, and equipment are needed. To this end, your Committee has provided $5.3 million over the biennium to UH-Hilo to:

• Fully fund the College of Hawaiian Language Program;
• Create the North Hawaii Education and Research Center in Honokaa;
• Staff the Pacific Aquaculture and Coastal Resources Center to be completed in Summer 2005;
• Create a Center for Rural Science in Hilo;
• Address past and post enrollment growth with additional instructional and student services staff;
• Achieve Title IX compliance for UH-Hilo athletics in the areas of women’s golf, soccer, and basketball;
• Provide the Mauna Kea Astronomy Education Center with personnel critical to start services in Fall 2005; and
• Provide additional resources and support staff to the Edwin H. Mookini library.

As the only accredited medical school in the central Pacific, JABSOM is committed to its goal of improving the healthcare standards of Hawaii and the Pacific region. Although its primary focus is on the healthcare needs of Hawaii’s people, JABSOM also maintains a role as an active leader in medical research in Hawaii and throughout the world. With the new state-of-the-art medical school facility in Kakaako scheduled to open in August 2005, a satellite of existing and new private bioscience companies is being attracted to the area.

Your Committee is aware that biotechnology is quickly becoming another major source of revenue and is therefore committed to providing a total of $9,000,000 in additional general funds over the biennium for the new medical school for start-up operating cost shortfalls. While the medical school is expected to become self-sufficient in the next few years, your Committee is committed to preventing an unnecessary tuition increase for the medical students over the short term.

Your Committee has provided funding to UH in specific targeted areas, piercing the veil of lump sum budgeting to provide resources most needed by the various colleges in the University system. The specific increases provided were determined after receiving input from the public, other legislators, and contacts within the University system.

Following its analysis of the Department of Human Services (DHS) budget, your Committee has cautiously approved most of the Administration's recommendations. However, there have been deficiencies in communications with DHS. Your Committee hopes that the unnecessary red tape will be lifted by the Administration to allow the Legislature to fulfill its constitutional responsibility to set policy and prioritize the budgetary needs of state agencies. Lack of information on a timely basis has hampered efforts by your Committee to adequately and accurately analyze DHS’s budget and make responsible recommendations to the House of Representatives.

Your Committee also expresses concerns over the upcoming audits from the state Auditor’s office and the federal Office of the Inspector General. Additionally, DHS has requested that the Legislature delay audits of Temporary Assistance for Needy Families funds by the Auditor. Your Committee hopes that DHS will not restrict access to information and that it will work cooperatively with the Senate Ways and Means Committee, the Legislature, and the Auditor to provide transparency in government, which is in the best interests of the people of Hawaii.

While your Committee has many concerns, it is important to note that DHS plays a critical role in assisting the most needy people of the State of Hawaii. Despite a lack of information, your Committee is unwilling to reduce the appropriations to DHS, as budgetary restrictions could adversely affect Hawaii's needy. Nevertheless, your Committee again emphasizes its strong concerns regarding DHS's practice of withholding information requested by the Legislature when DHS plays such a key role in serving Hawaii's needy families.

Your Committee, in analyzing the Hawaii Health Systems Corporation (HHSC), has found that HHSC maintains an accrual based accounting system to identify all expenses. However, it is your Committee’s desire that HHSC present to the Legislature its future budgets using a cash accounting system basis, because a cash-based accounting system would provide a clearer format to the Legislature as to those liabilities that would have a financial impact on HHSC.

Your Committee has also identified that ending cash balances, per the audited financial statements of HHSC, have been:

• $6,969,580 for 2002;

• $15,270,902 for 2003; and

• $18,628,659 for 2004.

HHSC has continued to increase its cash on hand while maintaining that it needs additional general fund appropriations. Therefore it is recommended that HHSC provide the Legislature with a report, detailing the amount of funds necessary to meet its monthly obligations prior to its next request for general fund appropriations.

It has also been discovered that HHSC could be eligible to receive substantial additional federal funds that will help to absorb losses from Medicaid, Med-QUEST, and uninsured patients, and that there is the possibility of recovering retroactive funds covering losses from years past, as well as funds for future losses.

While HHSC is willing to cooperate with your Committee to identify the amount of the losses, DHS has failed to provide sufficient information to identify the amount of funds that may be recovered by HHSC. Further, DHS has not provided your Committee adequate access to information as to how DHS intends to create a mechanism to recover these federal funds, so that the funds recovered may be appropriated to HHSC.

Your Committee realizes the importance of transparency in government and has adhered to this philosophy in formulating this budget. The Department of Transportation's (DOT) movement of funds between cost elements did not provide enough transparency to make a distinction between requests for recurring and non-recurring costs.

Therefore, in the interests of transparency, your Committee has reduced all requests to effectively zero out the entire budget. Amounts were subsequently added back into the appropriate cost elements to reflect DOT's funding. It is hoped that building DOT’s budget from the ground up will increase transparency.

A request to convert approximately 400 positions currently funded in the Capital Improvements Program (CIP) portion of the budget to the operating portion of the budget was submitted by the Governor in her proposal to the Legislature. Initially, this request was touted as a cost-saving measure. However, DOT has since indicated that there will be no savings as a result of converting these positions, because they are currently funded by special funds in the CIP portion and will continue to be funded by special funds in the operating portion. In addition, your Committee cannot determine how this conversion will increase transparency and believes that the opposite is true. As such, your Committee has denied the conversion of these positions and will leave them funded by special funds in the CIP portion of the budget.

Your Committee continues to support native Hawaiians as they return to their lands, gain self-sufficiency, and preserve their culture. Measuring the effectiveness of DHHL allows your Committee to support planned goals established by the Hawaiian Homes Commission Act of 1920.

Your Committee identified a need for DHHL to separate its operating functions from its administrative functions, so that it might clearly identify the different roles these functions play in supporting DHHL's goals. An administrative program, Management and General Support for Hawaiian Homesteads (HHL625), has thus been established by your Committee, separating administrative from operating functions, and hopefully leading to greater transparency, accountability, and success in achieving the mission of DHHL.

Since it began in 1999, the Integrated Tax Management System (ITMS) promised to serve as a viable tool allowing the State to locate and generate additional revenue by facilitating all facets of Department of Taxation operations. With its final phase of implementation just completed, your Committee continues to support ITMS and its role in generating untapped revenues. Along with this new system, which your Committee has supported since its inception, your Committee has provided for 26 new positions in FY 2005-2006, and 6 new positions in FY 2006-2007, allowing for the eventual collection of an estimated $38,750,000 per year in additional revenue. In addition to the Administration’s request, a total of five additional new positions were added by your Committee on to further enhance revenue collection by an additional estimated $3,750,000 in FY 2005-2006 and $7,500,000 in FY 2006-2007.

For FB 2005-2007, the Administration requested approximately $647,000,000 in general obligation (G.O.) bond-funded projects and $1,558,930,000 in projects financed from all means of financing. While the rising cost of debt service is a concern, it is important to allocate resources to provide for essential services. Therefore, your Committee has approved over $756,000,000 in G.O. bond-funded appropriations, as well as $1,969,887,000 in appropriations from all means of financing over the biennium.

In recent years, the large repair and maintenance backlog for public schools has been decreasing through an aggressive funding approach as well as cooperation between the Executive Branch and the Legislature. However, more work is needed to address the $500,000,000 backlog of repairs. To this end, your Committee has appropriated $150,000,000 over the biennium to help make every school a safe and exciting place to learn.

In addition to repair and maintenance improvements at our schools, over $145,000,000 has been appropriated over the biennium to construct new school facilities, modernize classrooms, and comply with various health and safety codes, regulations, and mandates.

The UH system is another institution that plays a vital role in this state. To enhance the learning environment for students on the different campuses, nearly $257,000,000 has been appropriated in all means of financing for CIPs. Of this amount, over $197,000,000 in G.O. bonds are earmarked for various upgrades, improvements, and new facilities, including:

• Over $45,000,000 to construct a new Hawaiian language building and a new science and technology building at UH-Hilo; and

• Over $33,000,000 for new facilities on community college campuses on Hawaii, Maui, and Kauai.

Our residents and visitors rely almost exclusively on air transportation for interisland travel. As this mode of travel becomes more and more expensive, the Hawaii Superferry could offer an attractive alternative. This budget includes $40,000,000 for harbor improvements to enable Hawaii Superferry to begin service between islands.

Many of these deserving projects are to be financed through the issuance of bonds. However, after receiving a Governor's Message (February 18, 2005) just two weeks ago, your Committee has determined that the Administration did not propose to issue enough G.O. bonds between now and FY 2008-2009 to finance all of the G.O. bond-funded projects – those previously appropriated as well as those requested by the Administration. This means that under the Administration's bond issuance plan, there would be a shortfall in financing all of the approved projects.

At the beginning of 2005, the Department of Business, Economic Development, and Tourism (DBEDT) reported that Hawaii’s economic indicators showed a continued positive trend. Employment and job growth, investment in construction and real estate, and visitor industry arrivals provided strong support for an optimistic view of Hawaii’s economy.

Unemployment in the state fell to an average of 3.1 percent for 2004 from 4.3 percent for 2003. The number of bankruptcy filings in Hawaii decreased for the eleventh consecutive quarter, with 25.6 percent fewer filings in the fourth quarter of 2004.

Construction jobs and real estate demand remained strong in the fourth quarter of 2004 and are poised for continued growth.

The economic indicators of the visitor industry continued to show solid gains. During the fourth quarter of 2004, the total number of visitors arriving by air increased by 7.0 percent from the fourth quarter of 2003. Hotel occupancy rates increased from 71.3 percent in the fourth quarter of 2003 to 73.4 percent in the fourth quarter of 2004.

Despite the benefits of strong real estate, construction, and tourism, rising inflation continues to be of concern to your Committee. Hawaii's inflation rate increased by 3.3 percent in the second half of 2004, the same amount of increase as the first half of 2004. Comparatively, the rate of inflation on the Mainland was 3.0 percent for 2004. The increase in consumer prices in Hawaii can be attributed to higher housing costs and gasoline prices.

All of these indicators reflect a strong economy and provide your Committee with a sense of cautious optimism. However, while the strength of Hawaii’s economy is evident based on the data collected, there are concerns, such as those associated with Hawaii's relatively high inflation rate, the federal budget, and the global economy, that warrant a cautious approach in planning for the future.

The budget is a complicated document, which attempts to balance the different needs and priorities of all the people of the State of Hawaii. Competing needs faced your Committee during its formulation of the budget, requiring decisions to be made. The approach of your Committee is to invest in our future, and provide those essential services that are requested by the community.

Your Committee provided for basic needs by investing in our education system and ensuring that our children will have a decent meal and adequate transportation to and from school. In addition, the Legislature placed a priority on dealing with the ice epidemic with the passage of Act 40 last year. Your Committee has followed through on that priority by restoring funding that was not included in the Governor’s original budget submittal.

This draft is one step in the budget process. Your Committee on Finance looks forward to working with the Senate Committee on Ways and Means and the Administration to craft the best possible budget for the people of Hawaii.

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. 100, as amended herein, and recommends that it pass Second Reading in the form attached hereto as H.B. No. 100, H.D. 1, and be placed on the calendar for Third Reading.