Honorable Robert Bunda

President of the Senate

Twenty-Third State Legislature

Regular Session of 2005

State of Hawaii

Sir:

Your Committee on Ways and Means, to which was referred H.B. No. 100, H.D. 1, entitled:

begs leave to report as follows:

The purpose of this measure 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 developed a balanced budget that is fiscally responsible and financially sound. It addresses the concerns and needs of our communities by taking into consideration the State's economic outlook and the impact of the federal government's spending and mandates.

At its March 8, 2005 meeting, the Council on Revenues updated its forecast of the general fund tax revenues for fiscal year 2004-2005 and beyond. The growth rate for the current fiscal year is forecast at 10 per cent, up from 8.8 per cent from their January 6, 2005 prediction. However, the Director of Taxation cautioned the Council that a good portion of the increase in revenues over the last fiscal year are attributable to one-time events that are unlikely to be repeated. The Council also revisited their visitor arrival assumptions and deemed them too high. Applying that rate to our current visitor levels would mean that total visitor arrivals would exceed eight million a year in the very near future. This was deemed to be an unrealistic forecast given our current capacity and lack of plans to increase it. The growth forecast was therefore lowered for fiscal year 2005-2006 from 5.3 per cent to 5 per cent and for the following year from 5.7 per cent to 4.9 per cent.

Although the outlook based upon the Council's projections is promising, your Committee remains cautious because of the anticipated reduction in state tax revenue. Additionally, a reduction in federal funding to Hawaii is looming on the horizon, as Congress debates the President's plan to shift more of its current services and obligations onto the states.

President Bush and Congress, in their efforts to control the growing federal deficit, have increasingly forced states to shoulder a greater burden of federally-mandated programs. According to the National Conference of State Legislatures' March 8, 2005 edition of the Mandate Monitor, at least $30,000,000,000 in federal mandates and cost shifts have been proposed by the President in the 2006 federal budget. These come after at least $51,000,000,000 in unfunded mandates and cost shifts previously enacted in fiscal year 2003-2004 and fiscal year 2004-2005. Some of the potential adjustments identified by the National Conference on State Legislatures that would hurt states are:

These cuts and mandates leave the State of Hawaii potentially underfunded by $75,300,000 for the No Child Left Behind Act, and reduces federal funding by $7,300,000 for community and economic development. Other proposals in the President's budget are a reduction of $10,700,000 in homeland and security funding for the State, and a reduction for Hawaii's elementary and secondary schools of 1.7 per cent, or $178,000,000.

The President's budget proposal also does not include funding for the ongoing war in Iraq, social security reforms, or for existing federal tax cuts to be extended or made permanent. If adopted by Congress, this budget package will have a severe impact on Hawaii's state budget as well as our economy as a whole. Hawaii's current optimistic economic forecast may need to be discounted with these impending federal burdens.

According to the State Budget Update of November 2004 by the National Conference of State Legislatures, state finances are improving in the near term. The National Conference of State Legislatures reports that the recovery that began last year is stronger and more widespread today with revenues for the first few months of fiscal year 2004-2005 at or above projections in nearly every state. Budget overruns are less severe than in recent years and budget gaps are almost eliminated. In short, state finances are stable or improving for most states.

Unfortunately, this reprieve from budget problems is likely to be temporary. A preliminary look at fiscal year 2005-2006 budget issues reveals that another round of fiscal challenges is developing. States will face funding pressures from elementary-secondary (K-12) education, medicaid and other state programs, coupled with concerns about structural gaps in taxation and spending, creating challenges for next year's budget deliberations.

According to National Conference of State Legislatures, Hawaii joins the overwhelming majority of states with no budget gaps for fiscal year 2004-2005, with only three states reporting gaps. Hawaii also falls in line with half of the states entering fiscal year 2005-2006 without any spending overruns (however, emergency appropriation requests are anticipated). Performance of major tax categories has exceeded fiscal year 2003-2004 expectations, with the outlook for fiscal year 2005-2006 positive but not likely to match or exceed the current fiscal year.

Like the majority of the states, one of Hawaii's top three fiscal issues for the current session is K-12 education, focusing on education reform and supporting the weighted student formula that was enacted last year. In addition, Hawaii is one of seven states to name corrections and public safety as a priority, as well as one of five states most concerned about transportation.

In October of 2004, the Board of Education approved a biennial operating budget request of an additional $102,700,000 to address essential public school programs. The biennial budget was later revised upward of an additional $3,000,000. After reviewing and revising the Board of Education's biennial budget, the executive branch submitted a biennial budget on behalf of the Department of Education totaling only $23,500,000, creating a shortfall of $79,200,000 to $82,100,000.

Due to fiscal constraints, your Committee could not provide for the total shortfalls created by the executive branch. However, your Committee provided funding for key educational programs, including $10,600,000 over the fiscal biennium 2005-2007 to address shortfalls for services for children with autism and an additional $6,000,000 over fiscal biennium 2005-2007 for increases in contracted services for children with autism.

In addition, your Committee provided $2,600,000 over fiscal biennium 2005-2007 to address shortfalls for special education teachers in grades K-12 and $2,000,000 over fiscal biennium 2005-2007 to address shortfalls in student transportation. Your Committee also provided $4,900,000 ($2,000,000 in fiscal year 2005-2006 and $2,900,000 in fiscal year 2006-2007) for non-recurring costs for school equipment and textbooks.

In fiscal biennium 2003-2005, the Legislature noted that there were accumulated balances in federal and special funds for school food services. As a result, general fund appropriations were reduced in the 2003-2005 fiscal biennium in order for the Department of Education to expend the excess federal and special funds. The Department of Education has informed the legislature that those federal and special funds will be depleted by the end of fiscal year 2004-2005. The executive branch restored less than half of the amounts required by school food service. Due to fiscal constraints, your Committee could not fully restore the entire request for school food service, and has provided an additional $10,000,000 over the fiscal biennium for school food service.

As part of Act 51, Session Laws of Hawaii 2004, also known as the Reinventing Education Act of 2004, your Committee approved the transfer of one hundred sixty-four permanent positions and the related $13,000,000 from the Department of Accounting and General Services to the Department of Education for repairs and maintenance of school facilities.

Furthermore, your Committee provided $6,000,000 ($783,000 in fiscal year 2005-2006 and $5,300,000 in fiscal year 2006-2007) to implement conversion of school principals from a ten-month to twelve-month salary schedule.

Finally, the executive branch only provided a scant $200,000,000 in capital improvements program funds over the fiscal biennium for all of the Department of Education's capital requirements. Your Committee finds that this offering is embarrassingly short of the $500,000,000 needed to satisfy the enormous need in repair and maintenance projects, as well as other needed improvements. As a result, your Committee provided a total of $295,000,000 in capital improvements program funds: $150,000,000 for school repairs and maintenance, and $145,000,000 for other school improvements.

On September 10, 2004, the University of Hawaii Board of Regents approved a detailed biennial operating budget request of $70,000,000 ($31,000,000 in fiscal year 2005-2006 and $39,000,000 in fiscal year 2006-2007) and forwarded that plan to the Governor. The Board's budget plan included the creation of many positions vital to the expansion of programs such as Workforce Development and Economic Diversification Initiatives to meet the needs of the State in areas of occupational growth as well as personnel shortages (e.g. teaching, nursing, and construction), and leveraging the resources of the University of Hawaii for economic expansion and job creation. However, the executive branch revised the budget down to $25,000,000 -- lump-sum amounts of $10,000,000 in fiscal year 2005-2006 and $15,000,000 in fiscal year 2006-2007. The University of Hawaii was allowed to revise its request to include a one-time appropriation of $20,000,000 in fiscal year 2005-2006 to initiate a student scholarship and assistance fund.

The inherent nature of budgeting in lump sum amounts prevents your Committee from performing its due diligence analysis of budget proposals. By its very nature, lump sum budgets do not present basic information such as where money is expended (which campus of the University of Hawaii system), who benefits from the expenditures, what is being received as a result of expenditures, and how the money is to be expended. As a result, lump sum budgets prevent subsequent oversight of expenditures. As the lump sum budget request did not originate from the University of Hawaii Board of Regents, the University of Hawaii administration could not provide adequate detailed information as to the distribution of the lump sum amounts, which frustrated your Committee.

Based on the difficulties inherent in lump sum budgets, your Committee did not approve these budget requests as presented by the executive branch. Furthermore, the lump sum amounts did not take into consideration the future collective bargaining costs related to the contract between the University of Hawaii and the University of Hawaii Professional Assembly.

In addition, the University of Hawaii administration could not provide your Committee with adequate information as to the details regarding the student scholarship and assistance revolving fund, again preventing your Committee from performing its due diligence analysis. Essentially, the University of Hawaii must expend resources to provide instructional services to students, regardless of whether students pay for the services. The student scholarship and assistance fund would replace the current tuition waiver system. However, as informally explained to your Committee, the student tuition and assistance revolving fund would only provide an accounting resource and not the actual monetary infusion that the University of Hawaii currently loses from students that are granted tuition waivers. In addition, the intent of the student scholarship and assistance revolving fund was to enable students to claim tax credits which they could not do with tuition waivers. In this respect, your Committee believes that the University of Hawaii was misinformed as to the nature of educational tax credits. Individuals must pay educational costs in order to claim any educational tax credits. Assistance, whether in the form of tuition waivers or scholarships cannot be used to claim tax credits.

On March 25, 2004, the Governor, jointly with the President of the University, members of the University of Hawaii Board of Regents, and the University of Hawaii Professional Assembly announced that it had reached an unprecedented six-year collective bargaining contract between the State and University of Hawaii professors. Among other things, the contract provided for pay increases equating to raises of over thirty-four per cent over the six-year contract, with the cost borne entirely by the State for the first three years, and then split between the State and the University of Hawaii over the last three years. Total obligations are estimated to be $124,000,000 to the State and $39,000,000 to University of Hawaii. State law requires that this contract becomes valid only if the Legislature appropriates the necessary funds to pay for the new cost items. Last year, your Committee raised several concerns regarding this multi-biennial contract.

During the 2004 legislative session, one of your Committee's greatest concerns was that, in order for the University of Hawaii to pay for its portion of the contract, tuition for students may have to be raised. While your Committee cannot draw a direct correlation between the pay raises and the actions of the University of Hawaii, we note that in March of this year, the University of Hawaii proposed an increase in tuition to more than double its current rate within the next five years. Among its priorities, the University of Hawaii cites the need to hire and retain faculty and fix classrooms and buildings. While your Committee recognizes that the needs expressed by the University of Hawaii are legitimate and valid, it notes that, in its current biennial budget, the University of Hawaii identified $20,000,000 ($4,500,000 in fiscal year 2005-2006 and $15,500,000 in fiscal year 2006-2007) in addition to collective bargaining costs over and above the $8,600,000 in collective bargaining costs expended in prior years. Despite these concerns, your Committee intends to fully provide for the University of Hawaii Professional Assembly's collective bargaining costs of $37,200,000 ($13,100,000 in fiscal year 2005-2006 and $24,100,000 in fiscal year 2006-2007).

Despite substantial collective bargaining costs and lower overall revenue expectations from the Council of Revenues, your Committee remains committed to the vision of creating a world-class institution of higher learning and has provided nearly $13,000,000 ($5,800,000 in fiscal year 2005-2006 and $6,900,000 in fiscal year 2006-2007) in increased support for University of Hawaii programs, including approximately $3,000,000 ($1,400,000 in fiscal year 2005-2006 and $1,600,000 in fiscal year 2006-2007) for community college programs and $3,000,000 ($1,000,000 in fiscal year 2005-2006 and $2,000,000 in fiscal year 2006-2007) for the "B Plus" State Scholarship program.

Your Committee also provided $13,000,000 ($6,100,000 in fiscal year 2005-2006 and $6,900,000 in fiscal year 2006-2007) in general funds and revolving funds to address projected shortfalls in operating, faculty, and support functions at the new facilities for the John A. Burns School of Medicine. Your Committee believes that prior University of Hawaii administrations may have been overly optimistic as to the short-term potential of the new John A. Burns School of Medicine facilities at Kakaako to generate external grant and other non-general funds. However, your Committee continues to believe in the medium and long-range potential of the John A. Burns School of Medicine facilities at Kakaako in becoming a world-class health, biomedical, and biotech research and teaching facility.

In this regard, your Committee provided for budget shortfalls of the John A. Burns School of Medicine with a combination of general fund and revolving fund moneys. Although the University of Hawaii administration did not adequately budget for "start-up" or operating costs, your Committee acknowledges that millions of dollars have already been committed to the construction of the John A. Burns School of Medicine. It would not be fiscally responsible to then have the facilities sit dormant or under-utilized because funds were not provided for the "start-up" or day-to-day operations. Your Committee also recognizes the fact that, while research has the potential of becoming "self-supporting", this does not apply to the educational portion of the Kakaako facility. The intent of your Committee is to add general funds to support costs associated with the educational functions of the facility while authorizing expenditure ceiling increases from the research and training revolving fund to temporarily support the research component of the John A. Burns School of Medicine Kakaako facility. This will give the research component of the facility time to become fully operational to fulfill the expectations of the legislature, the university community, and the general public in becoming a world-class medical, biomedical, and biotech center. It is hoped that, as more external funding is obtained for research by the school of medicine, the initial "investment" from the research and training revolving fund will be returned exponentially.

The research and training revolving fund is the depository for overhead reimbursements that the State or the University of Hawaii expended in support of administering federal grants. Historically, the University of Hawaii has allowed the research unit that obtained federal grants to retain approximately fifty per cent of the reimbursement with the vice-president for research and various chancellors receiving the remaining fifty per cent. There are no federal guidelines as to the disposition of federal overhead reimbursements. In the distant past, all federal overhead reimbursements were deposited into the state treasury as general funds.

Finally, your Committee is authorizing expenditures of up to $2,500,000 over the biennium from the research and training revolving fund to provide state matching funds for the Hawaii Experimental Program to Stimulate Competitive Research for energy, sponsored by the National Science Foundation.

The paramount concerns of the Department of Public Safety continues to be the overcrowded conditions of our correctional facilities, the deteriorating physical condition of these facilities, and the increased demand for correctional services. Between fiscal year 1991-1992 and fiscal year 2004-2005, the Department has seen its base budget reduced by $23,400,000 and two hundred forty-six positions. During that same period, however, the inmate population has escalated by 123 per cent, from 2,700 to 6,030. As an example, on March 7, 2005, there were 3,943 inmates in facilities in Hawaii, although the capacity is only 3,487. Additionally, 1,617 Hawaii inmates were held in facilities on the mainland and ninety-nine were held at the Federal Detention Center on Oahu.

With the unlikelihood of any new facilities being built in the near future, transferring inmates to the mainland or to the Federal Detention Center is the best solution to reducing the overcrowding at our correctional facilities. This budget approves the Governor's request to transfer an additional five hundred twenty-six inmates to out-of-state facilities, which would bring the total Hawaii inmate population housed on the mainland to 2,143. Your Committee provided $10,200,000 for fiscal year 2005-2006 and $12,700,000 for fiscal year 2006-2007 for this purpose. Those amounts include $1,500,000 per year to cover a 2.50 per cent annual increase in the basic daily fee for the one thousand six hundred inmates currently held in mainland facilities. Furthermore, your Committee provided $8,200,000 for each fiscal year for one hundred forty more contract beds at the Federal Detention Center.

With the recent construction of new court buildings and the increased responsibility over state buildings and its interests, your Committee has provided for eighteen new deputy sheriff positions for Hawaii, Maui, and Oahu courts at a cost of $566,230 in fiscal year 2005-2006 and $851,604 in fiscal year 2006-2007.

Your Committee affirms its support and commitment to provide the resources necessary to address the various health needs of the people of Hawaii. Toward this end, the appropriations authorized by your Committee ensure sufficient funds for the Department's high priority areas, specifically -- substance abuse, developmental disabilities, and adult mental health.

Your Committee commends the Department of Health for its dedicated and continued efforts to comply with various court mandates. The Department's successes include the dismissal in December 2004 of the thirteen-year old civil rights Department of Justice lawsuit against the Hawaii State Hospital. Also, the Felix Consent Decree for children with severe mental disorders nears the end of its sustainability period and court mandate in June 2005.

Your Committee firmly recognizes the need to continue the work of the Joint House-Senate Task Force on Ice and Drug Abatement, which provided a comprehensive plan last legislative session established under Act 40, Session Laws of Hawaii 2004, to address the ice epidemic. Accordingly, your Committee provided an additional $13,700,000 in general funds for substance abuse treatment services and prevention programs over the biennium for both adolescents and adults. Your Committee also notes that the level of funding provided for substance abuse exceeds the executive branch's biennial request, which only provided marginal support to stem the ice epidemic.

To provide for the increase in the number of individuals with developmental disabilities admitted to the Home and Community Based Waiver Services, your Committee provided $15,710,000 in general funds over the biennium to be matched by Title XIX federal funds.

Your Committee also provided $1,000,000 in general funds for each year of the biennium to fund emergency medical services for the County of Maui's aeromedical services.

Funding levels for outpatient services of the Adult Mental Health Division for the biennium was based on its emergency appropriation request for this current fiscal year. Earlier this year, your Committee, upon review of the data provided by Adult Mental Health Division, determined that there was a need for closer scrutiny of its budget request and requested the Adult Mental Health Division to reevaluate its data and methodology and present its updated recommendations. These findings included a smaller than expected growth in the cost of its contracted services. The Adult Mental Health Division also determined that its original fifteen per cent rate increase in clients did not materialize as projected.

Toward this end, your Committee was informed that no additional general funds are required for the upcoming biennium. Your Committee however did provide a special fund ceiling increase to allow for reimbursements under the new Medicaid Rehabilitation Option program for the Adult Mental Health Division. Furthermore, $996,960 in general funds was provided to the Hawaii State Hospital to cover increasing costs for pharmaceutical drugs, implement an automated medication dispensing system and acquire medication carts over the biennium. Your Committee also provided $2,820,000 in general funds for staffing support for the Community Mental Health Centers statewide.

The Hawaii Health Systems Corporation has been provided with a continued recurring source of general funds amounting to $27,800,000 annually. Your Committee believes that significant progress has been made over the last few sessions to create transparency, resulting in more open communication between the Corporation and the Legislature. Moreover, your Committee is aware of the on-going negotiations between the Department of Human Services and the Centers for Medicare and Medicaid Services to amend its current Medicaid QUEST Demonstration Project waiver program. When implemented, the waiver will permit the Hawaii Health Systems Corporation's acute care hospitals to recover a portion of their unreimbursed costs for providing health care to those in our population that are either indigent or uninsured. These payments, aptly named "DSH-Like" payments, simulate for Hawaii the "Disproportionate Share Hospital" reimbursements that other states receive by federal allotment provided under federal law.

Your Committee is mindful that, when implemented, these reimbursements will provide some fiscal relief to the Hawaii Health Systems Corporation. Concurrently, upon receipt of the federal reimbursements, your Committee expects the Hawaii Health Systems Corporation to cooperate and to reimburse the state treasury with the appropriate amount of general funds that the Corporation will receive in federal funds.

Your Committee believes that the Healthy Start program under the Maternal and Child Health Services Division deserves further scrutiny. In January of 2005, the Department of Health, on its own volition, chose not to include a proviso similar to Section 24 of Act 200, Session Laws of Hawaii 2003, earmarking $5,200,000 in Tobacco Settlement Special Funds for the Healthy Start program. As a result of this exclusion, the Healthy Start program's base funding may be reduced by $5,200,000. Your Committee has not been able to obtain timely or forthright responses from the Healthy Start program.

Your Committee also notes that the Department of Health readily acknowledges this is an internal issue that needs to be rectified in the very near future. The Department further acknowledges that the program is in need of retooling and program review. Toward this end, your Committee has issued a proviso for the Healthy Start program to address its internal issues and determine its effectiveness and relevance.

Your Committee has added $8,200,000 in fiscal year 2005-2006 and $9,200,000 in fiscal year 2006-2007 in tourism special funds for the continued expansion of its promotional programs. However, the Committee has also reduced funding for marketing in other areas where the results were significant in showcasing Hawaii's assets, but the return on investment could not be quantified to justify additional funds.

Your Committee has provided $1,500,000 in each fiscal year of the biennium for the Hawaii Experimental Program To Stimulate Competitive Research that has proven to be successful over the last three years and $551,769 in fiscal year 2005-2006 and $251,769 in fiscal year 2006-2007 for the implementation of the Petroleum Industry Data and Information Functions as mandated by chapter 486J, Hawaii Revised Statutes.

Since 1999, when the Department began installing the first phase of the Integrated Tax Management System, the State began to locate and generate additional revenues through improved tax collection efficiencies. Now with its final phase of implementation just about completed, your Committee continues to support the Integrated Tax Management System and is appropriating $2,500,000 over the next biennium for production support to ensure that the system continues to operate at its fullest potential.

Your Committee has also provided twenty-six new auditor and collector positions in fiscal year 2005-2006 and six new positions in fiscal year 2006-2007 to allow for the eventual collection of approximately $38,700,000 in additional annual tax revenues.

Your Committee believes that continued and expanded efforts to combat invasive species in the State is necessary. In response to various threats such as the Coqui frog and Salvinia Molesta, the 2003 Legislature established the Hawaii Invasive Species Council. The Hawaii Invasive Species Council was charged with protecting the State against invasive species threats to Hawaii's economy, natural environment, and to the health and lifestyle of Hawaii's people. To show its full support in combating invasive species, your Committee agreed with the Governor's request and provided $4,000,000 for fiscal years 2005-2006 and 2006-2007, subject to matching non-state funds.

Hawaii's environment is its most important economic asset. It spurs a tourist industry that has dominated Hawaii's economy for decades. There is a need to prevent the incursion of invasive species that pose a threat to Hawaii's unique flora and fauna. To address this, your Committee approved the addition of ten plant quarantine inspector positions to perform detector dog handler duties. Your Committee also supports the Senate's commitment to agricultural research. Your Committee restored $494,721 in general funds for both fiscal years for agriculture development, research, and marketing.

Your Committee also values the economic contribution of Hawaii's farmers. In March 23, 2005, the Governor requested the addition of more than $184,000 in general funds to the Department of Agriculture's supplement for both fiscal years. This is to help farmers cover the increasing costs of water use and irrigation maintenance. Your Committee concurs with the administration to address the farmers' plight.

Your Committee appreciates the sacrifices of our dearly departed veterans who defended our freedom and liberties. However, the executive branch's request for the rehabilitation of the Hawaii State Veteran's Cemetery for $131,200 for fiscal year 2006 and $56,250 for fiscal year 2007 was not approved. Instead, the requested amount plus the addition of more than $21,000 for fiscal year 2006 was appropriated under House Bill No. 115, Senate Draft 2, as a senate amendment. Your Committee believes that the use of only one bill for this endeavor promotes fiscal transparency and legislative efficiency.

Your Committee understands the geographical vulnerability of Hawaii. In light of recent events in South Asia, your Committee funded the conversion of various temporary civil defense positions to permanent status. This will enable the State to be more informed on, and prepared for, natural and man-made disasters. Your Committee also authorized more than $10,000,000 in federal funds to reflect homeland security grant funds to assist counties and state agencies in combating terrorist threats and calamities.

Despite the strong economic indicators for Hawaii and the Council on Revenues' positive revenue projections, your Committee has taken a very prudent approach to allocating our financial resources in a manner that will continue to keep our economy on the track of sustainable growth.

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