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11/24/2020

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Auditor’s Summary

 

Two funds did not meet criteria

WE REVIEWED 29 FUNDS AND ACCOUNTS administered by the Judiciary – specifically, 6 special funds, 2 revolving funds, 17 trust funds, and 4 trust accounts. We found 1 special fund and 1 trust fund did not meet criteria. We recommended the special fund, which does not appear to be financially self-sustaining, be repealed and the trust fund be reclassified to a special fund.

Section 23-12, Hawai‘i Revised Statutes (HRS), requires the Auditor to review all existing special, revolving, and trust funds every five years. Reviews are scheduled so that each department’s funds are reviewed once every five years. Although not mandated by statute, we included trust accounts as part of our review. This is our sixth review of the Judiciary’s revolving funds, trust funds, and trust accounts, and our second review of the Judiciary’s special funds.

We used criteria developed by the Legislature and by our office based on public finance and accounting literature. For each fund, we present a five-year financial summary, the purpose of the fund, and conclusions about its use. We did not audit the financial data which is provided for informational purposes. We do not present conclusions about the effectiveness of programs or their management, or whether the programs should be continued.

Reporting shortfall

WE NOTED THAT THE JUDICIARY did not file statutorily required reports for non-general funds totaling more than $47 million. Accurate and complete reporting will greatly improve the Legislature’s oversight and control of these funds and provide increased budgetary flexibility.

Agency response

THE JUDICIARY generally agreed with our findings but disagreed with our assessment that one trust fund should be reclassified to a special fund. We maintain that the fund does not meet the criteria of a trust fund because it functions as, and meets the criteria for, a special fund and should be reclassified.

As to our observations on the Judiciary’s reporting of non-general funds, the Judiciary stated that it will take immediate corrective action to ensure compliance with reporting requirements.

FUND TYPES

SPECIAL FUNDS are used to account for revenues earmarked for particular purposes and from which expenditures are made for those purposes.

REVOLVING FUNDS such as loan funds, are often established with an appropriation of seed money from the general fund and must demonstrate the capacity to be self-sustaining.

TRUST FUNDS such as a pension fund, invoke the State’s fiduciary responsibility to care for and use the assets held to benefit those with a vested interest in the assets.

TRUST ACCOUNTS are typically separate holding or clearing accounts and are often used as accounting devices for crediting or charging state agencies or projects for payroll and other costs.

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Report No. 20-17, Review of Special Funds, Revolving Funds, Trust Funds, and Trust Accounts of the JudiciaryMost Recent, Summary
11/19/2020

Photo: Department of Hawaiian Home Lands

Auditor’s Summary

 

One fund did not meet criteria

WE REVIEWED 13 FUNDS AND ACCOUNTS administered by the Department of Hawaiian Home Lands (DHHL) – specifically, 4 special funds, 2 revolving funds, 6 trust funds, and 1 trust account. We found 1 trust fund did not meet criteria and should be reclassified to a trust account.

Section 23-12, Hawai‘i Revised Statutes (HRS), requires the Auditor to review all existing special, revolving, and trust funds every five years. Reviews are scheduled so that each department’s funds are reviewed once every five years. Although not mandated by statute, we included trust accounts as part of our review. This is our sixth review of DHHL’s revolving funds, trust funds, and trust accounts, and our second review of DHHL’s special funds.

We used criteria developed by the Legislature and by our office based on public finance and accounting literature. For each fund, we present a five-year financial summary, the purpose of the fund, and conclusions about its use. We did not audit the financial data which is provided for informational purposes. We do not present conclusions about the effectiveness of programs or their management, or whether the programs should be continued.

Reporting shortfall

WE NOTED THAT DHHL did not file statutorily required reports for non-general funds totaling $1,783,000. Accurate and complete reporting will greatly improve the Legislature’s oversight and control of these funds and provide increased budgetary flexibility.

Agency response

DHHL DISAGREED with our assessment that one trust fund should be reclassified to a trust account, which is the same determination we reached in our 2015 review of DHHL’s funds. We maintain that the fund does not meet the criteria of a trust fund because it functions as, and meets the criteria for, a trust account and therefore should be reclassified.

As to our observations on DHHL’s reporting of non-general funds, DHHL stated that it was an oversight and that corrective action has been taken.

FUND TYPES

SPECIAL FUNDS are used to account for revenues earmarked for particular purposes and from which expenditures are made for those purposes.

REVOLVING FUNDS such as loan funds, are often established with an appropriation of seed money from the general fund and must demonstrate the capacity to be self-sustaining.

TRUST FUNDS such as a pension fund, invoke the State’s fiduciary responsibility to care for and use the assets held to benefit those with a vested interest in the assets.

TRUST ACCOUNTS are typically separate holding or clearing accounts and are often used as accounting devices for crediting or charging state agencies or projects for payroll and other costs.

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Report No. 20-16, Review of Special Funds, Revolving Funds, Trust Funds, and Trust Accounts of the Department of Hawaiian Home LandsSummary
11/17/2020

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AUDITOR’S SUMMARY

 

Financial Statements, Fiscal Year Ended June 30, 2019

THE PRIMARY PURPOSE of the audit was to form an opinion on the fairness of the presentation of the financial statements for the Employees’ Retirement System of the State of Hawai‘i, as of and for the fiscal year ended June 30, 2019. The audit was conducted by KPMG LLP.

Financial Highlights

FOR THE FISCAL YEAR ended June 30, 2019, ERS reported total net additions of approximately $2.13 billion. Additions consisted of $1.2 billion from contributions and $933 million in net investment income.

Total deductions of approximately $1.5 billion consisted of (1) $1.47 billion for benefit payments; (2) $14 million for administrative expenses; and (3) $17 million for refund of member contributions.

As of June 30, 2019, assets totaled $18.69 billion and liabilities totaled $1.46 billion, leaving a net position balance of $17.23 billion. Total assets included (1) investments of $17.89 billion; (2) receivables of $222 million; (3) cash of $576 million; and (4) net equipment of $7 million.

Auditors’ Opinion
ERS RECEIVED AN UNMODIFIED OPINION that the financial statements were presented fairly, in all material respects, in accordance with generally accepted accounting principles.

Findings
THERE WERE NO REPORTED DEFICIENCIES IN INTERNAL CONTROL over financial reporting that were considered to be material weaknesses and no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards.

About the System

THE EMPLOYEES’ RETIREMENT SYSTEM OF THE STATE OF HAWAI‘I (ERS) is a cost-sharing, multiple-employer retirement system for government workers. Through its pension benefits program, ERS provides a defined-benefit pension plan for all state and county employees, including teachers, professors, police officers, firefighters, correction officers, judges and elected officials. ERS is governed by a Board of Trustees, which consists of eight members.

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Financial Audit of the Employees’ Retirement System of the State of Hawai’iFinancial Audit, Summary
10/14/2020

Auditor’s Summary


As a novel coronavirus ravaged regions in Asia, Europe, and the continental United States, the State of Hawai‘i took an unprecedented step to prevent the virus that causes COVID-19 from spreading in the Islands. Since March 26, all travelers entering the state – visitors and returning residents alike – have been required to self-quarantine for 14 days upon arrival, with limited exceptions. According to the Director of the Hawai‘i Emergency Management Agency, who is appointed by the Governor to serve as the Incident Commander for COVID-19, the self-quarantine mandate was meant to deter visitor traffic as well as restrict the mobility of those who do travel to Hawai‘i during the period they might be contagious. The effect on travel was immediate – April 2020 arrivals were down 99 percent from a year earlier and have remained at depressed levels since.

The travel self-quarantine program has evolved over the past six months 
and is on the cusp of yet another major change; effective October 15, a new pre-travel testing program will allow visitors to bypass self-quarantine with proof of negative results from a state-approved COVID-19 testing partner within 72 hours of flying to Hawai‘i. Yet two days before the pre-travel testing program was set to be launched, details of how it will work – particularly on the neighbor islands – were still unsettled. The lingering uncertainty as Hawai‘i begins reviving its tourism industry reflects many of the concerns raised in our limited scope review of the travel self-quarantine program. While we observed well-intentioned, hard-working state and county employees during our work on this report, we did find an overall lack of coordinated planning and communication among the state and county agencies involved. This has diminished the effectiveness of the self-quarantine program and raises questions about the program’s future success.

About this report

At the Senate Special Committee on COVID-19’s request, we performed a limited scope review of the travel self-quarantine program. Our report includes a high-level analysis of the airport screening process for trans-Pacific and interisland arrivals, the web-based Safe Travels program that collects travelers’ health and trip details and makes the information available to those responsible for ensuring compliance, enforcement efforts, and both near-term and long-range planning. It also offers recommendations aimed at providing oversight and improving coordination and communication among the many agencies charged with developing, operating, and enforcing the travel self-quarantine mandate.

What we observed

The travel self-quarantine program is a multiagency effort, pulling together the Department of Transportation-Airports Division (DOT-Airports), the Hawai‘i Tourism Authority (HTA), the Office of Enterprise Technology Services (ETS), the Hawai‘i Emergency Management Agency, the Hawai‘i National Guard, the Department of the Attorney General, and county law enforcement, as well as the Department of Health (DOH). While the Incident Commander is responsible for overseeing the State’s overall response to the COVID-19 pandemic, we could not identify any individual who is tasked with operational oversight over the travel quarantine component of the State’s response and familiar with all aspects of the program.

Rather, we discovered each state and county agency is generally operating in its own “silo,” focused on a specific function and not necessarily considering the big picture. For example, ETS created the web-based Safe Travels platform to expedite the airport screening process led by DOT-Airports, automate compliance checks previously performed by HTA, and help county police departments enforce the self-quarantine requirements. In practice, though, Safe Travels has not eliminated the need for airport screeners to manually verify health and trip information that passengers are required to provide on the State’s digitized health and travel form prior to departure. Automated emails and text messages that remind all people in self-quarantine to check in daily have replaced a 100-person call center that reached only 10 percent of those in quarantine. However, the automated daily check-ins are through email and soon, voice bots, but do not include location information to confirm that the person is checking in from their designated self-quarantine location.

Generally, we found information does not flow smoothly between the state and county agencies involved in different aspects of the program. While the State has led screening efforts at the airports, enforcing the travel quarantine has fallen to the counties, which have taken different approaches to ensuring compliance with the travel self-quarantine. Kaua‘i, for example, has adopted the strictest measures, conducting 300 in-person compliance checks a day with the assistance of Hawai‘i National Guard personnel and collecting traveler information on its own form instead of relying on the State’s mandatory travel and health form that collects the same information. In other counties, enforcement has been largely reactive, dependent on reports and complaints from the public, social media, and interested community groups. As a result, the self-quarantine is largely an “honor” system, dependent upon the deterrent effect of potential penalties and the visitor’s tolerance for risk.

Issues and Concerns

An absence of near-range and long-term planning raises questions about the program’s future even as the State anticipates an imminent increase in arrivals. Passenger screening, currently led by DOT-Airports and staffed by the Hawai‘i National Guard and private contractors, will be handed off to DOH at the end of the year. We found little evidence of planning for this impending transition, however, which is now less than three months away. None of the people we interviewed could even tell us how the travel self-quarantine program will be funded after the end of the year, which includes contracts with Roberts Hawaii Tours, Inc. and Worldwide Flight Services, Inc. to screen arriving trans-Pacific travelers at some of the State’s airports, as well as the counties’ costs to enforce the quarantine. Those expenses currently are paid with moneys the State received through the CARES Act, which must be spent by December 30, 2020.

According to the Incident Commander, “When [DOT-Airports] started screening, I told them that we cannot have the perfect product. However, just by announcing it and doing it, we will eliminate 90 percent of the visitors.” The travel self-quarantine mandate initially reduced visitor arrivals by 98 percent, he said, calling that “a huge success.” Nevertheless, more than six months after the travel quarantine mandate went into effect, we expected to see better communication and coordination between the agencies responsible for different aspects of the program. The program is hampered by a lack of oversight and the absence of a defined organizational structure to effectively and efficiently manage every piece of the process, starting from screening at the airports to enforcement of the quarantine requirement. Instead, the apparent delegation of authority to agencies to develop their own processes to support their responsibilities relating to the travel self-quarantine program has created inefficiencies and other concerns that likely have – and, if unaddressed, will continue to – hurt the effectiveness of the program.

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Report No. 20-13, Limited Scope Review of the State of Hawai‘i’s Mandatory Travel Self-Quarantine ProgramSummary
09/24/2020

ILLUSTRATION: THINKSTOCK.COM

AUDITOR’S SUMMARY

Financial Statements, Fiscal Year Ended December 31, 2019

THE PRIMARY PURPOSE of the special-purpose audit was to form an opinion on the fairness of the presentation of the financial statements for the Hawai‘i Convention Center, as of and for the year ended December 31, 2019. The special-purpose financial statements have been prepared pursuant to the provisions of the management agreement between the Hawai‘i Tourism Authority and AEG Management HCC, LLC (AEG), a private company contracted to operate the Hawai‘i Convention Center. The audit was conducted by Accuity LLP.

Financial Highlights

FOR THE YEAR ended December 31, 2019, the Center reported total revenues of $16.9 million, total expenses of $23.5 million, and $12.8 million in net contributions from the Hawai‘i Tourism Authority, which resulted in an increase in net assets of $6 million. Revenues consisted of (1) $11.1 million from food and beverage; (2) $2.7 million from rental income; (3) $2.9 million from events; and (4) $200,000 from other revenues.

Expenses consisted of (1) $8 million for personnel services; (2) $4.7 million for building-related expenses; (3) $4.9 million for cost of goods sold; and (4) $5.9 million for other costs.

As of December 31, 2019, the Center’s total assets of $30 million were comprised of (1) cash of $19.5 million; (2) amounts due from Hawai‘i Tourism Authority of $8.7 million; (3) accounts receivable of $1.2 million; and (4) other assets of $600,000. Total liabilities of $4.5 million were comprised of (1) accounts payable of $1.9 million; (2) amounts due to Hawai‘i Tourism Authority of $1.1 million; (3) advance deposits of $700,000; and (4) other liabilities of $800,000.

Property, building, furniture, and equipment used in the Center’s operations, and related depreciation expense, as well as debt used to finance such capital assets and the related interest expense, are not reflected in the Center’s special-purpose financial statements. Those assets, liabilities, and related expenses are reflected on the financial statements of the Hawai‘i Tourism Authority.

Auditors’ Opinion
THE CENTER RECEIVED AN UNMODIFIED OPINION that its financial statements were presented fairly, in all material respects, in accordance with the management agreement between the Hawai‘i Tourism Authority and AEG, which is a basis of accounting other than accounting principles generally accepted in the United States of America.

About the Center

THE HAWAI‘I CONVENTION CENTER (Center), which opened to the general public in June 1998, is used for a variety of events, including conventions and trade shows, public shows, and spectator events. The Center offers approximately 350,000 square feet of rentable space, including 51 meeting rooms. The Hawai‘i Tourism Authority assumed responsibility for the operation, management, and maintenance of the Center in July 2000. The Center is reported as a special revenue fund of the Hawai‘i Tourism Authority.

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Department of Business, Economic Development & Tourism, Hawai’i Convention Center – December 31, 2019 Special Purpose Financial StatementsSummary
08/28/2020

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Auditor’s Summary

On August 13, 2020, the Senate Special Committee on COVID-19 asked the Auditor to report on protocols currently employed by the Hawai‘i State Department of Education (DOE) to address the coronavirus that causes the disease COVID-19. This report specifically discusses DOE’s policies and procedures regarding when teachers, other school employees, and students are confirmed positive for COVID-19.

As we note throughout our report, we received no cooperation from DOE. The department did not provide any of the documents we requested, limiting our review to policies and procedures that are publicly available on DOE’s website and elsewhere online. We had hoped to interview DOE to clarify how these plans have been implemented and followed, among other things. However, notwithstanding repeated requests, DOE declined to schedule meetings with us before the issuance of this report. As many of our questions echo those being asked by the public and public officials, it is unreasonable for DOE to refuse our requests about their safety and health guidelines. This is especially critical since teachers and some students have already returned to campus.

About this report
While DOE did not provide us with documents nor make staff available for interviews, the information we found on the department’s website appears to include policies and procedures that guide DOE’s response to positive COVID-19 cases involving school employees and students. We summarized the documents we were able to locate, primarily DOE’s Pandemic Contagious Virus Plan, Emergency Operations Plan, Return to Learn: School Reopening Plan, Health and Safety Handbook, and Principal Handbook. We also summarized policies and procedures for communications, including disseminating information about positive COVID-19 cases. Without interviewing DOE staff, however, we were unable to determine if DOE is following these guidelines or if there are other policies and procedures that guide its actions.

Issues and questions

We have numerous questions about the policies and procedures outlined in the documents, some of which appear outdated and incomplete. We also found inconsistencies in the guidance. For example:

• DOE takes the position that the Department of Health is the lead agency for notifying people who are COVID-19 positive or who may have been exposed to a positive case. The Department of Health is responsible for notifying the school of positive cases involving school employees or students by letter to the principal and provides the principal with the start and end dates of the person’s required isolation. We have no information to confirm the Department of Health is, in fact, notifying school principals.

• The Return to Learn: School Reopening Plan, Health and Safety Handbook is silent regarding notification by the Department of Health about school employees or students who are close contacts of a COVID-19 positive case. We assume the Department of Health obtains school-specific information from close contacts, including the school at which the person works or attends. However, we could not verify if the Department of Health notifies principals or others about school employees and students who may be infected because of their contact with someone who has tested positive. The department’s policies and procedures are also silent as to actions the school takes when informed that its employee or student is a close contact of someone who is positive.

• The Department of Health is responsible for tracing and contacting the infected person’s close contacts. The Hawai‘i State Teachers Association (HSTA) told us that some principals have been conducting contact tracing themselves because the Department of Health is overwhelmed.

• Although DOE has communication policies and procedures in place to address COVID-19 cases, we question whether the department is following its own guidance. DOE generally has not provided information about COVID-19 cases on school campuses and the limited information that it does share has been inconsistent and incomplete. For instance, DOE had not been publicizing positive cases until pressed by HSTA. Then, citing privacy laws, DOE only provided information by large complex areas, prompting the teachers’ union to begin identifying specific schools.

• The department’s Communications Plan seems to delegate school-level communication decisions to the principals, including informing their respective school communities about positive cases. While we are aware, anecdotally, about some school principals sending letters about positive cases to teachers and staff, we were unable to determine whether principals have notified students, families, and others who are part of the “impacted school community” about all of the positive cases on their respective school campuses.

• DOE justifies its limited reporting of positive cases to avoid any potential Family Educational Rights and Privacy Act (FERPA) and/or Health Insurance Portability and Accountability Act (HIPAA) violations. We question whether FERPA or HIPAA apply to information about positive cases in a specific school, including whether the case involves a teacher, administrator, support staff, or student, which contains no personally identifiable information. The U.S. Department of Health and Human Services and the U.S. Department of Education have issued guidance about the application of HIPAA and FERPA, respectively, that seems inconsistent with the department’s position.

• The Pandemic Contagious Virus Plan includes a four-page Cleaning and Disinfecting of Facilities Protocol Checklist that details procedures for the cleaning and disinfecting of facilities when a positive case is associated with a school. According to the checklist, once a positive case has been identified, the campus is closed to all employees and students for 21 days. We question whether the department is following its cleaning and disinfection procedures. While the department has not identified specific schools, it has confirmed positive cases on a number of its school campuses. We are unaware of any school closures for cleaning and disinfecting.

• The Pandemic Contagious Virus Plan is intended “to increase communication to our [DOE] staff and students in the event of an outbreak.” It includes four response levels and corresponding department actions. However, it is unclear which response level individual schools are at, and consequently, unclear what actions the schools should take. In addition, portions of the document appear outdated, such as guidance on social distancing considerations and troubleshooting technology problems.

• The Pandemic Contagious Virus Plan provides relatively detailed information about routine cleaning and sanitization of facilities and devices. While some procedures may seem reasonable on their face, such as training of school custodial staff through online video, webinar, and/or in-person training, we did not have the opportunity to review any of those materials. The procedures also require that high-touch surfaces in classrooms such as chairs, desks, and tabletops be cleaned multiple times throughout the day. The document, however, is silent as to who is responsible for the cleaning. During the August 20 Board of Education meeting, in response to similar questions, we understood DOE to say teachers are explicitly not responsible for cleaning classrooms under the current union contract.

• We are unclear whether the department is using the Pandemic Contagious Virus Plan. We have not seen media reports about an “Incident Command Center” within DOE nor an individual serving as the department’s incident commander. We also are unaware of information through news releases or other publications to “ethnic media,” as used in the Pandemic Plan. And, certain portions of the Pandemic Contagious Virus Plan seem to be outdated.

• The Principal Handbook, dated July 29, 2020, version 2, contains information and guidance about school operations in the current COVID-19 pandemic, yet does not contain information specific to a positive COVID-19 case on a school campus. This version includes outdated start dates for students, leaving us to question whether this handbook is current. We found that it also offers guidance that conflicts with guidelines from the Centers for Disease Control and Prevention and the Department of Health, such as allowing student desks to be 3-feet apart, only half the distance CDC recommends.

Recommendations

1. DOE must update its policies and procedures, as needed, to be consistent with current State and County policies, including the Governor’s proclamations and amendments thereto and the orders issued by the county mayors. While we recognize the situation continues to evolve and is fluid, if the Pandemic Plan and the handbooks are intended to be DOE’s policies and procedures relating to the current COVID-19 situation, those documents need to be continually and immediately updated as the State of Hawai‘i, the various counties, and the department’s policies and procedures change. We noted a number of policies and procedures that appear to be inconsistent with the department’s actual approach to positive cases on its school campuses.

2. DOE must obtain legal guidance from the Department of the Attorney General about the application of HIPAA, FERPA, and other privacy laws to reporting of COVID-19 confirmed positive cases on school campuses. Specifically, the Department of Attorney General should advise as to whether, among other things: (1) HIPAA bars the department from disclosing that an unnamed DOE employee has tested positive at a specific public school; (2) HIPAA bars the department from disclosing that an unnamed student has tested positive at a specific public school; (3) HIPAA bars the department from disclosing that an unnamed individual who was on a specific public school campus has tested positive; (4) FERPA bars the department from disclosing that an unnamed DOE employee has tested positive at a specific public school; (5) FERPA bars the department from disclosing that an unnamed student has tested positive at a specific public school; and (6) FERPA bars the department from disclosing that an unnamed individual who was on a specific public school campus has tested positive.

To the extent HIPAA, FERPA, and other laws do not prohibit DOE from reporting information about positive cases, the department should do so no later than 24 hours after it is informed of a positive case. That disclosure should state, among other things:

(1) the date of the positive test result;

(2) whether the positive case is a teacher, an administrator, support staff, or a student;

(3) the specific school where the department employee works or the student attends;

(4) the times the infected person was on the school campus in the two days immediately prior to positive test results; and

(5) the dates and times the infected person was on campus after the positive test results.

Information should include details about the cleaning and disinfecting of affected spaces, including the closure of school campuses or school facilities.

3. DOE should report, separately, the number of school personnel and students who are self-isolating and self-quarantining by school and update those numbers within 24 hours of changes to the number of school personnel and students who are directed to self-isolate and self-quarantine.

4. DOE must provide complete and timely information to the public about changes to its policies and procedures relating to the department’s COVID-19 response, generally, and not limited to DOE’s protocols for when there is a positive case on a school campus. For instance, the department must provide the criteria or other considerations it is using to formulate decisions regarding, for instance, when students will be allowed to return to school campuses for in-person instruction.

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Report No. 20-11, Report on the Hawai‘i State Department of Education’s Policies and Procedures for Handling Positive COVID-19 Test Results in Staff, Teachers, and StudentsSummary
07/13/2020

Hawaii DOT – Highways Division

AUDITOR’S SUMMARY

Financial and Compliance Audit of the Department of Transportation, Highways Division
Financial Statements, Fiscal Year Ended June 30, 2019

THE PRIMARY PURPOSE  of the audit was to form an opinion on the fairness of the presentation of the financial statements for the Department of Transportation, Highways Division, as of and for the fiscal year ended June 30, 2019, and to comply with the requirements of Title 2, U.S. Code of Federal Regulations, Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), which established audit requirements for state and local governmental units that receive federal awards. The audit was conducted by KKDLY LLC.

Financial Highlights

FOR THE FISCAL YEAR ended June 30, 2019, DOT–Highways reported total revenues of $558 million and total expenses of $567 million, resulting in a decrease in net position of $9 million. Revenues consisted of (1) $225 million in tax collections; (2) $251 million in grants and contributions primarily from the Federal Highway Administration; (3) $55 million in charges for services; and (4) $27 million in investment income and other revenues.


Expenses consisted of (1) $202 million for operations and maintenance; (2) $205 million in depreciation; (3) $145 million for administration and other expenses; and (4) $15 million in interest.

As of June 30, 2019, total assets and deferred outflows of resources of $5.41 billion were comprised of (1) cash and investments of $329 million; (2) net capital assets of $5.03 billion; and (3) $50 million in other assets and deferred outflows of resources. Total liabilities of $606 million included $429 million in revenue bonds and $177 million in other liabilities.

DOT–Highways has numerous capital projects ongoing statewide; construction in progress totaled $369 million at the end of the fiscal year.

Auditors’ Opinion

DOT-HIGHWAYS RECEIVED AN UNMODIFIED OPINION that its financial statements were presented fairly, in all material respects, in accordance with generally accepted accounting principles. DOT–Highways also received an unmodified opinion on its compliance with major federal programs in accordance with the Uniform Guidance.

Findings

THERE WERE ONE MATERIAL WEAKNESS in internal control over financial reporting that is required to be reported under Government Auditing Standards. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented or detected and corrected on a timely basis. The reconciliation process for FY 2019 was not completed until June 16, 2020, more than eleven months after the fiscal year-end. Information about this audit and the material weakness identified by auditors is described on pages 12-16 of the single audit report.

There were no findings that are considered material weaknesses in internal control over compliance in accordance with the Uniform Guidance. However, the auditors identified one deficiency in internal control over compliance that is considered a significant deficiency. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. The deficiency is described on pages 17-18 of the single audit report.

About the Division

 

The mission of the Department of Transportation, Highways Division (DOT–Highways), is to provide a safe, efficient, and sustainable State Highway System that ensures the mobility of people and goods within the state. The division is charged with maximizing available resources to provide, maintain, and operate ground transportation facilities and support services that promote economic vitality and livability in Hawai‘i. The Department also works with the Statewide Transportation Planning Office on innovative and diverse approaches to congestion management.

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Financial and Compliance Audit of the Department of Transportation, Highways DivisionSummary
06/25/2020

Illustration: istock.com

AUDITOR’S SUMMARY

This report assesses certain tax exemptions and exclusions from Hawai‘i’s General Excise Tax (GET) and Use Tax. Section 23-71 et seq., Hawai‘i Revised Statutes, requires the Auditor to annually review different tax exemptions, exclusions, and credits on a 10-year recurring cycle, including provisions for the Public Service Company Tax and Insurance Premium Tax. This report is our first review under these statutes.

As described by the Department of Taxation (DoTax), Hawai‘i’s GET and Use Tax, combined, apply to nearly all business activities in Hawai‘i, resulting in a $111 billion tax base. In FY2018, GET and Use Tax revenues accounted for $3.55 billion, or 31 percent, of the State’s total revenue of $11.32 billion. Notwithstanding, lawmakers may choose to exempt or exclude certain revenues from taxation to promote social and economic goals. Since these exemptions and exclusions reduce revenues to the State, the analysis and recommendations in this report aim at better informing policymakers about the purposes, costs, and benefits of various GET and Use Tax provisions to allow for improved policymaking.

This report reviews 13 tax provisions: 6 GET and Use Tax exemptions and 
7 GET exclusions. Overall, we found, with one exception, there is insufficient data to determine whether the exemptions reviewed are meeting their stated or inferred purposes. We recommend the one exemption that is not achieving its purpose be repealed and the Legislature consider including clearly articulated purposes along with specific metrics for measuring effectiveness in all new or amended tax preferences. As noted throughout this report, we struggled to determine the purposes of the provisions reviewed and, in some cases, were unable to even infer the purposes. Additionally, we had no objective means to assess whether provisions were achieving their purposes. Including clearly stated purposes for each tax provision and metrics for us to assess performance will permit a more thorough and meaningful analysis of exemptions. We further recommend that all seven exclusions be removed from the schedule of future reviews.

Exclusions and Exemptions
Policymakers use tax preferences to promote various economic and social goals. Such provisions may allow money that would otherwise be spent on taxes to remain in the hands of taxpayers. For example, taxpayers who own or operate businesses may use those tax savings to create jobs. Other preferences may provide economic support to specific segments of society.

Exclusions
Exclusions remove revenues from certain activities that were never intended to be part of a broadly defined tax base. Excluded amounts generally are not included in a taxpayer’s reported revenues and are therefore not taxed.

Example: The exclusion for gross receipts from sales of securities excludes such revenue from GET. This revenue does not have to be reported. However, in some instances capital gains from securities sales are still subject to Hawai‘i income tax.

Exemptions
Exemptions refer to receipts from taxable activities or goods that, for policy purposes, are not subject to tax collection.

Example: Contractors can deduct payments made to subcontractors from their gross revenue and avoid GET liability on those amounts. The exemption for amounts paid by contractors to subcontractors shifts payment of GET at the 4 percent retail rate on those amounts to the subcontractor, effectively eliminating the pyramiding of GET. The Legislature hoped that the reduced taxes paid by general contractors would lower the cost of housing.

Exemptions come at a cost. Allowing certain taxpayers to reduce the amount of gross revenues that are subject to GET reduces the amount of tax revenues that might otherwise be available for the State to spend. While direct spending programs are subject to review through the budgetary process, monies the State does not see can be more challenging to evaluate. Identifying whether the benefits of tax exemptions outweigh their costs can be a complex endeavor, but such reviews can provide important information to legislators about the effectiveness of a tax preference and monies that may be available for other state priorities.

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Report No. 20-09, Review of Excise and Use Tax Exemptions and ExclusionsSummary
06/16/2020

PHOTO: OFFICE OF THE AUDITOR

AUDITOR’S SUMMARY

Financial and Compliance Audit of the Department of Human Services
Financial Statements, Fiscal Year Ended June 30, 2019

THE PRIMARY PURPOSE  of the audit was to form an opinion on the fairness of the presentation of the financial statements for the Department of the Attorney General, as of and for the fiscal year ended June 30, 2019, and to comply with the requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), which established audit requirements for state and local governmental units that receive federal awards. The audit was conducted by Egami & Ichikawa CPAs, Inc.

Financial Highlights

FOR THE FISCAL YEAR ended June 30, 2019, AG reported total revenues of $109.6 million and total expenses of $109.2 million, resulting in an increase in net position of $400,000. Revenues include general revenues of $50.3 million, primarily state appropriations; and program revenues consisting of charges for services of $25.2 million and operating grants and contributions of $34.2 million.

 

Expenses of $109.2 million consist of (1) $65 million for general administrative and legal services; (2) $22.5 million for child support enforcement; (3) $14.8 million for crime prevention and justice assistance; and (4) $6.9 million for criminal justice data center activities.

Fiduciary Fund Deficit

Inflows and outflows of funds related to the Child Support Enforcement Agency program are accounted for separately in an agency fund. The report notes under usual conditions, agency fund assets should be equal to agency fund liabilities, as the funds are held on behalf of others; however, AG continues to maintain a deficit balance of approximately $551,000 at June 30, 2019. According to AG, the deficit balance is caused by a combination of uncollected recoupments due from custodial parents resulting from overpayments and uncollected non-sufficient fund payments due from non-custodial parents.

Auditors’ Opinion

ATG RECEIVED AN UNMODIFIED OPINION that its financial statements were presented fairly, in all material respects, in accordance with generally accepted accounting principles. AG also received an unmodified opinion on its compliance with major federal programs in accordance with the Uniform Guidance.

Findings

THERE WERE NO MATERIAL WEAKNESSES AND ONE SIGNIFICANT DEFICIENCY in internal control over financial reporting that is required to be reported under Government Auditing Standards. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. The significant deficiency related to the fiduciary fund deficit noted above is described on pages 71-73 of the report.

There were no findings that are considered to be material weaknesses in internal control over compliance in accordance with the Uniform Guidance.

About the Department

 

The Department of the Attorney General (AG) provides legal services to the executive, legislative, and judicial branches of Hawai‘i State government, including furnishing formal and informal legal opinions to the Governor, Legislature, and heads of Hawai‘i State departments and offices and approving documents relating to the acquisition of lands and interests by the State. AG also maintains criminal justice information, conducts investigations, operates crime prevention programs, and represents the State of Hawai‘i in legal proceedings. AG’s Child Support Enforcement Agency provides assistance to children by locating parents, establishing paternity and support obligations, and enforcing those obligations.

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Financial and Compliance Audit of the Department of the Attorney GeneralSummary
04/17/2020

PHOTO: DEPARTMENT OF HUMAN SERVICES

AUDITOR’S SUMMARY

Financial and Compliance Audit of the Department of Human Services
Financial Statements, Fiscal Year Ended June 30, 2019

THE PRIMARY PURPOSE  of the audit was to form an opinion on the fairness of the presentation of the financial statements for the Department of Human Services, as of and for the fiscal year ended June 30, 2019, and to comply with Title 2, U.S. Code of Federal Regulations, Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), which established audit requirements for state and local governmental units that receive federal  awards. The audit was conducted by KMH LLP.

Financial Highlights

FOR THE FISCAL YEAR ended June 30, 2019, DHS reported total revenues of $3.42 billion and total expenses of $3.46 billion. Revenues consist of $1.21 billion in state allotments, net of lapsed amounts plus non-imposed employee fringe benefits, and $2.21 billion in operating grants from the federal government. Revenues from these federal grants paid for 63.8 percent of the cost of DHS’ activities.


Health care and general welfare assistance programs comprised 72.7 and 20.5 percent, respectively, of the total cost. The following chart presents each major activity as a percentage of the total cost of all DHS activities.

 

As of June 30, 2019, DHS’ total assets of $593 million included (1) cash of $369 million, (2) receivables of $154 million, and (3) net capital assets of $70 million. Total liabilities of $328 million included (1) vouchers payable  of $22 million, (2) accrued wages and employee benefits of $27 million, (3) amounts due to the state general fund of $197 million, (4) accrued medical  assistance payable of $68 million, and (5) accrued compensated absences of $14 million.

Auditors’ Opinion

DHS RECEIVED AN UNMODIFIED OPINION that its financial statements are presented fairly, in all material respects, in accordance with generally accepted accounting principles. DHS received a qualified opinion on its compliance for all major federal programs, except for Foster Care – 
Title IV-E, Social Services Block Grant and Disability Insurance/SSI Cluster, which received an unmodified opinion in accordance with the Uniform Guidance.

Findings

THERE WAS ONE SIGNIFICANT DEFICIENCY in internal controls over financial reporting that is required to be reported under Government Auditing Standards. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. The significant deficiency is described on pages  76-77 of the report.

There were 13 material weaknesses in internal control over compliance that are required to be reported in accordance with the Uniform Guidance. A material weakness in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented or detected and corrected on a timely basis. The material weaknesses are described on pages 78-99 of the report.

About the Department

 

The Department of Human Services (DHS) works to provide benefits and services to individuals and families in need. The majority of DHS’ budget is comprised of federal funds. DHS’ mission is to direct its funds toward protecting and helping those least able to care for themselves and to provide services designed toward achieving self-sufficiency for clients as quickly as possible. Activities include health care programs; general welfare assistance, employment and support services; child welfare and adult community care services; vocational rehabilitation and services for the blind; youth prevention, delinquency and correction services; and general administration. Attached programs include the Commission on the Status of Women and Commission on Fatherhood.

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Financial and Compliance Audit of the Department of Human ServicesSummary
04/15/2020

PHOTO: OFFICE OF THE AUDITOR

AUDITOR’S SUMMARY

Financial and Compliance Audit of the Department of Education
Financial Statements, Fiscal Year Ended June 30, 2019

THE PRIMARY PURPOSE  of the audit was to form an opinion on the fairness of the presentation of the financial statements for the Department of Education, as of and for the fiscal year ended June 30, 2019, and to comply with the requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), which established audit requirements for state and local governmental units that receive federal awards. The audit was conducted by KKDLY LLC.

Financial Highlights

FOR THE FISCAL YEAR ended June 30, 2019, DOE reported total revenues of $3.2 billion and total expenditures of $3.14 billion, resulting in an increase in net position of $65 million.


Total revenues of $3.2 billion consisted of (1) $2.03 billion in state-allotted appropriations, net of lapsed funds, (2) $779 million in non-imposed employee wages and fringe benefits, (3) $288 million in operating grants and contributions, (4) $43 million in capital grants and contributions, and (5) $67 million in charges for services.


Total expenses of $3.14 billion consisted of $2.95 billion for school-related costs, $83 million for state and school complex area administration, $37 million for public libraries, and $72 million for capital outlay.

As of June 30, 2019, total assets exceeded total liabilities by $2.7 billion. Of this amount, $769 million is unrestricted and may be used to meet ongoing expenses and obligations. Total assets of $3.22 billion were comprised of cash of $1.23 billion, receivables of $66 million, and net capital assets of $1.93 billion. Total liabilities of $525 million were comprised of (1) vouchers and contracts payable of $134 million, (2) accrued wages and employee benefits of $152 million, (3) accrued compensated absences of $72 million, (4) workers’ compensation claims reserve of $147 million, (5) amount due to the state general fund of $5 million, and (6) notes payable of $15 million.

Auditors’ Opinion

DOE RECEIVED AN UNMODIFIED OPINION that its financial statements were presented fairly, in all material respects, in accordance with generally accepted accounting principles. DOE also received an unmodified opinion on its compliance with major federal programs in accordance with the Uniform Guidance.

Findings

THERE WERE NO REPORTED DEFICIENCIES in internal controls over financial reporting that are considered to be material weaknesses and required to be reported under Government Auditing Standards. However, the auditors identified one deficiency in internal control over financial reporting that is considered a significant deficiency. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. The deficiency is described on pages 53-55 of the report.

There were no findings that are considered material weaknesses in internal control over compliance in accordance with the Uniform Guidance. However, the auditors identified one deficiency in internal control over compliance that is considered a significant deficiency. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. The deficiency is described on pages 56-57 of the report.

About the Department

 

The Department of Education (DOE) administers the statewide system of public schools and public libraries. DOE is also responsible for administering state laws regarding regulation of private school operations through a program of inspection and licensing and the professional certification of all teachers for every academic and noncollege type of school. Federal grants received to support public school and public library programs are administered by DOE on a statewide basis.

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Financial and Compliance Audit of the Department of EducationSummary
04/13/2020

ILLUSTRATION: THINKSTOCK.COM

AUDITOR’S SUMMARY

Single Audit of Federal Financial Assistance Programs of the State of Hawai‘i
Financial Statements, Fiscal Year Ended June 30, 2019

THE PRIMARY PURPOSE  of the State Single Audit for the fiscal year ended June 30, 2019, was to comply with the Code of Federal Regulations, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, Title 2, Part 200 (Uniform Guidance), which established audit requirements for state and local governmental units that receive federal awards. The State Single Audit was conducted by Accuity LLP.

Auditors’ Report on Internal Controls over Financial Reporting

THE AUDITORS IDENTIFIED one material weakness and two significant deficiencies in internal controls over financial reporting that are required to be reported in accordance with Government Auditing Standards. The material weakness is described on pages 22-25 of the report, and the significant deficiencies are described on pages 18-21 of the report.

A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented or detected and corrected on a timely basis.

A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.

 

Auditors’ Report on Compliance with Major Federal Programs

THE AUDITORS EXPRESSED A QUALIFIED OPINION on certain major programs and identified five material weaknesses and six significant deficiencies over compliance with major federal programs that are required to be reported in accordance with the Uniform Guidance. These findings are described in a Schedule of Findings and Questioned Costs that can be found on pages 26-38 of the report. A table with the number and type of findings by department can be found below.

A material weakness in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented or detected and corrected on a timely basis.

A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance.

About the Report

 

Single audits provide assurance to the federal government that state agencies and programs receiving federal funds are expending those funds properly. This report includes the total federal expenditures and findings related to only those departments that are included in the State of Hawaiʻi Single Audit of Federal Financial Assistance Programs for the fiscal year ended June 30, 2019. For the departments included in the report that receive federal monies, federal expenditures totaled approximately $298 million. Federal expenditures and findings for other departments including the Department of Health and the Department of Transportation are reported by those departments in individual audit reports.

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State of Hawai’i Single Audit ReportSummary
04/08/2020

PHOTO: OFFICE OF THE AUDITOR

AUDITOR’S SUMMARY

Financial Audit of Accounting and General Services, State Parking Revolving Fund
Financial Statements, Fiscal Year Ended June 30, 2019

THE PRIMARY PURPOSE  of the audit was to form an opinion on the fairness of the presentation of the financial statements for the Department of Accounting and General Services, State Parking Revolving Fund, as of and for the fiscal year ended June 30, 2019. The audit was conducted by KPMG LLP.

Financial Highlights

FOR THE FISCAL YEAR ended June 30, 2019, the Fund reported total revenues of $3.9 million and total expenses of $3.7 million. Total revenues consisted of parking assessments of $2.7 million, parking meter collections of $1 million, and traffic fines and other income of $200,000. Total expenses consisted of depreciation of $400,000, personnel services of $1.9 million, repairs and maintenance of $500,000, and other expenses of $900,000.

 

As of June 30, 2019, total assets and deferred outflows of resources of $18 million were comprised of (1) net capital assets of $14.6 million, (2) cash of $2.6 million, and (3) receivables and deferred outflows of resources of $800,000. Total liabilities and deferred inflows of resources of $6.8 million were comprised of (1) pension liability of $2.8 million, (2) net other postemployment benefits other than pensions of $2.8 million, and (3) accrued liabilities and deferred inflows of resources of 
$1.2 million.

Capital assets are used to provide parking for employees, contractors with state-related business, and the public. Net capital assets of $14.6 million consist of land of $9.3 million, structures and improvements of $4.9 million, and construction in progress of $400,000.

Auditors’ Opinion

THE FUND RECEIVED AN UNMODIFIED OPINION that its financial statements were presented fairly, in all material respects, in accordance with generally accepted accounting principles.

Findings

THERE WERE NO REPORTED DEFICIENCIES in internal control over financial reporting that were considered to be material weaknesses and no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards.

About the Fund

 

The State Parking Revolving Fund (Fund) was established by Act 161, Session Laws of Hawai‘i 1963 (codified as Section 107–11, Hawai‘i Revised Statutes). The Fund is responsible for the assessment and collection of reasonable parking fees, installation of parking meters, and the restriction and control of parking on all state lands within the state Comptroller’s jurisdiction. All fees, charges, and other revenue collected are deposited into this fund. Moneys are expended, as necessary, to defray the cost of paving parking areas as well as the purchase and installation of parking meters on state lands within the state Comptroller’s jurisdiction.

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Financial Audit of Accounting and General Services, State Parking Revolving FundSummary
04/06/2020

PHOTO: HAWAII DOT HARBORS DIVISION

AUDITOR’S SUMMARY

Financial Audit of the Department of Transportation, Harbors Division
Financial Statements, Fiscal Year Ended June 30, 2019

THE PRIMARY PURPOSE  of the audit was to form an opinion on the fairness of the presentation of the financial statements of the Department of Transportation, Harbors Division, as of and for the fiscal year ended June 30, 2019. The audit was conducted by KKDLY LLC.

Financial Highlights

FOR THE FISCAL YEAR ended June 30, 2019, DOT—Harbors reported total revenues of $198.7 million and total expenses of $93 million, resulting in an increase in net position of $105.7 million. Total revenues consisted of $159.2 million in services, $29.9 million in rentals, $7.9 million in interest income, and $1.7 million in other revenues.


Total expenses consist of $29 million in depreciation, $17.1 million in harbor operations, $9 million in interest and bond costs, $22.3 million for personnel, and $15.6 million in administration and other costs.

As of June 30, 2019, the agency reported total assets and deferred outflows of resources of $1.45 billion, comprised of: (1) cash and cash equivalents of $419.6 million, (2) receivables of $25.3 million, (3) net capital assets of $987.7 million, and (4) other assets and deferred outflows of resources of $14.6 million. Total liabilities and deferred inflows of resources totaled $451.3 million, comprised of: (1) $282.7 million in revenue bonds payable and related accrued interest payable, (2) $21 million in general obligation bonds payable, (3) $26 million in capital lease obligation and related accrued interest payable, (4) $4.6 million due to other State agencies, (5) $35.9 million in accounts and contracts payable, and (6) $81.1 million in other liabilities and deferred inflows of resources.

Auditors’ Opinion

DOT-HARBORS RECEIVED AN UNMODIFIED OPINION that its financial statements were presented fairly, in all material respects, in accordance with generally accepted accounting principles.

Findings

THERE WERE NO REPORTED DEFICIENCIES in internal control over financial reporting that were considered to be material weaknesses and no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards.

About the Division

 

The Department of Transportation, Harbors Division (DOT—Harbors) is responsible for the statewide system of commercial harbors, which consists of ten harbors on six islands. The system plays a vital role in Hawai‘i’s economy, as the harbors serve as the primary means for goods to enter and exit the State of Hawai‘i. Hawai‘i imports approximately 80 percent of what it consumes, the majority of which enters the State through the commercial harbors system. DOT—Harbors operations are self-sustaining. The Department of Transportation is authorized to impose and collects rates and charges for use of the harbors system and its properties to generate revenues to fund operating expenses. Capital improvements are funded by DOT—Harbors’ revenues and the issuance of harbor system revenue bonds.

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Financial Audit of the Department of Transportation, Harbors DivisionSummary
04/03/2020

PHOTO: HAWAII DOT AIRPORTS DIVISION

AUDITOR’S SUMMARY


Financial Statements, Fiscal Year Ended June 30, 2019

THE PRIMARY PURPOSE  of the audit was to form an opinion on the fairness of the presentation of the  financial statements of the Department of Transportation, Airports Division, as of and for the fiscal year ended June 30, 2019, and to comply with the requirements of Title 2, U.S. Code of Federal Regulations, Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), which set forth audit requirements for state and local governmental units that receive federal awards. The audit was conducted by KPMG LLC.

Financial Highlights

FOR THE FISCAL YEAR ended June 30, 2019, DOT-Airports reported total revenues of $646 million and total expenses of $473 million, resulting in an increase in net position of $173 million. Revenues consisted of $183 million in concession fees, $83 million in landing fees, $163 million in rentals, $126 million in facility charges, $52 million in federal operating
and capital grants, and $39 million in interest and other revenues.


Total expenses of $473 million consisted of $291 million for operations and maintenance, $122 million in depreciation, $23 million for administration,
and $37 million in interest and other expenses.

As of June 30, 2019, the agency reported total assets and deferred outflows of resources of $5.15 billion, comprised of (1) cash of $1.26 billion (2) investments of $304 million, (3) net capital assets of $3.43 billion, and (4) $155 million in receivables, other assets, and deferred outflows of  resources. Total liabilities and deferred inflows of resources totaled $2.56 billion, which includes $1.42 billion in airports system revenue bonds, $1.11 billion in other liabilities and deferred inflows of resources, and $22 million in special facility revenue bonds.


Revenue bonds for DOT-Airports are rated as follows:

• Standard & Poor’s Corporation: AA-
• Moody’s Investors Service: A1
• Fitch IBCA, Inc.: A+


DOT-Airports has numerous capital projects ongoing state-wide; construction-in-progress totaled $1.3 billion at the end of the fiscal year.

Auditors’ Opinion

DOT-AIRPORTS RECEIVED AN UNMODIFIED OPINION that its financial statements were presented fairly, in all material respects, in accordance with generally accepted accounting principles. DOT-Airports also received an unmodified opinion on its compliance with major federal programs in
accordance with the Uniform Guidance.

Findings

THERE WERE NO REPORTED DEFICIENCIES in internal control over financial reporting that were considered to be material weaknesses and no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. There were no findings that were considered material weaknesses in internal control over compliance in accordance with the Uniform Guidance.

About the Division

 

DOT—AIRPORTS operates and maintains 15 airports at various locations within the State of Hawai‘i as a single integrated system for management and financial purposes. Daniel K. Inouye International Airport is the principal airport in the airports system, providing facilities for interisland flights, domestic overseas flights, and international flights to destinations in the Pacific Rim. DOT-Airports is authorized to impose and collect rates and charges for the airports system services and properties to generate revenues to fund operating expenses. The Capital Improvements Program is primarily funded by airports system revenue bonds and lease revenue certificates of participation issued by DOT-Airports, federal grants, passenger facility charges, customer facility charges, and the DOT-Airports
revenues.

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Financial and Compliance Audit of the Department of Transportation, Airports DivisionSummary
04/01/2020

PHOTO: OFFICE OF THE AUDITOR

AUDITOR’S SUMMARY

Financial Statements, Fiscal Year Ended June 30, 2019

THE PRIMARY PURPOSE  of the audit was to form an opinion on the fairness of the presentation of the financial statements for the Department of Accounting and General Services, State Motor Pool Revolving Fund, as of and for the fiscal year ended June 30, 2019. The audit was conducted by KPMG LLP.

Financial Highlights

FOR THE FISCAL YEAR ended June 30, 2019, the Fund reported total revenues of $2.3 million and total expenses of $2.9 million, resulting in a decrease in net position of $600,000 (or 381 percent). Motor vehicle rentals and repairs represented 99 percent of the Fund’s total revenue and other income represented 1 percent.


Total expenses of $2.9 million consisted of personnel services of $1.3 million, depreciation of $900,000, gas and oil of $300,000, repairs and maintenance of $300,000, and other costs of $100,000.

As of June 30, 2019, total assets and deferred outflows of resources of $3.7 million were comprised of (1) cash and cash equivalents of $900,000, (2) net capital assets of $2 million, and (3) receivables and deferred outflows of resources of $800,000. Total liabilities and deferred inflows of resources of $4.6 million were comprised of (1) net pension liability of $2.4 million, (2) net other postemployment benefits other than pension of $1.9 million, and (3) other liabilities and deferred inflows of resources of $300,000.

Auditors’ Opinion

THE FUND RECEIVED AN UNMODIFIED OPINION that its financial statements were presented fairly, in all material respects, in accordance with generally accepted accounting principles.

Findings

THERE WERE NO REPORTED DEFICIENCIES in internal control over financial reporting that were considered to be material weaknesses and no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards.

About the Fund

 

The State Motor Pool Revolving Fund (Fund) was established pursuant to Act 77, Session Laws of Hawai‘i 1963 (codified as Section 105-11, Hawai‘i Revised Statutes). The Fund is responsible for providing safe and economical transportation for state personnel requiring the use of passenger vehicles in connection with official state business. All moneys collected are used for the acquisition, operation, repair, maintenance, storage, and disposition of all state-owned vehicles assigned to the state motor pool.

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Financial Audit of the Department of Accounting and General Services, State Motor Pool Revolving FundSummary
04/01/2020

PHOTO: OFFICE OF THE AUDITOR

AUDITOR’S SUMMARY

Financial Statements, Fiscal Year Ended June 30, 2019

THE PRIMARY PURPOSE of the audit was to form an opinion on the fairness of the presentation of the financial statements of the Department of Transportation, Administration Division, as of and for the fiscal year ended June 30, 2019, and to comply with the requirements of Title 2, U.S. Code of Federal Regulations, Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), which established audit requirements for state and local governmental units that receive federal awards. The audit was conducted by Egami & Ichikawa, Certified Public Accountants, Inc.

Financial Highlights

FOR THE FISCAL YEAR ended June 30, 2019, DOT–Administration reported total revenues of $29.5 million, total expenses of $21.4 million, and transfers to other DOT divisions of $6 million, resulting in an increase in net position of $2.1 million. The transfers relate to unencumbered cash balances related to assessment revenues from those divisions. Revenues consisted of $23 million from assessments, $5.1 million from federal grants, and $1.4 million from other revenue sources.

Total expenses of $21.4 million consisted of $10.3 million for operating grants and $11.1 million for administration.

As of June 30, 2019, total assets of $21.4 million were comprised of (1) cash of $18 million, (2) accounts receivable of $1.8 million, and (3) net capital assets of $1.6 million. Liabilities totaled $12.5 million, including a $2.6 million Aloha Tower Development Corporation note payable to the Harbors Division.

Auditors’ Opinion

DOT-ADMINISTRATION RECEIVED AN UNMODIFIED OPINION that its financial statements were presented fairly, in all material respects, in accordance with generally accepted accounting principles. DOT–Administration also received an unmodified opinion on its compliance with major federal programs in accordance with the Uniform Guidance.

Findings

THERE WERE NO REPORTED DEFICIENCIES in internal control over financial reporting that were considered to be material weaknesses and no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. There were no findings that were considered material weaknesses in internal control over compliance in accordance with the Uniform Guidance.

About the Division

 

Four divisions (Airports, Harbors, Highways, and Administration) make up the State’s Department of Transportation. The Administration Division (DOT–Administration) consists of the Office of the Director of Transportation, the Statewide Transportation Planning Office, and Departmental Staff Services Offices. Collectively, these offices provide overall administrative support for the Department of Transportation. The financial statements for the Division reflect the financial activities of DOT–Administration and the Aloha Tower Development Corporation, which is attached to the Department for administrative purposes. DOT–Administration receives a percentage of the Airports, Harbors, and Highways Divisions’ state-allotted appropriations to cover general administration expenses. The Department’s Statewide Transportation Planning Office administers certain Federal Transit Administration and Federal Highway Administration grants.

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Financial and Compliance Audit of the Department of Transportation, Administrative DivisionSummary
03/27/2020

AUDITOR’S SUMMARY

Financial Statements, Fiscal Year Ended June 30, 2019

THE PRIMARY PURPOSE of the audit was to form an opinion on the fairness of the presentation of the financial statements for the Department of Hawaiian Home Lands, as of and for the fiscal year ended June 30, 2019, and to comply with the requirements of Title 2, U.S. Code of Federal Regulations, Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), which established audit requirements for state and local governmental units that receive federal awards. The audit was conducted by Akamine, Oyadomari & Kosaki CPA’s Inc.


Financial Highlights

FOR THE FISCAL YEAR ended June 30, 2019, DHHL’s total revenues exceeded total expenditures by $18.1 million. Revenues totaled $73.8 million and consisted of (1) program revenue of $40.6 million and (2) state appropriations, transfers, and adjustments of $33.2 million. Expenses totaled $55.7 million. Program revenues were comprised of interest income (approximately 27 percent), grants and contributions (11 percent), revenue from the general lease program (43 percent), and other sources (19 percent).

As of June 30, 2019, total assets of $986 million exceeded total liabilities of $100 million, resulting in a net position balance of $886 million. Total assets included net capital assets of $479 million, cash of $370 million, loans receivable of $94 million, and other assets and deferred outflows of resources of $43 million. Loans receivable consisted of 1,336 loans made to native Hawaiian lessees for the purposes specified in the Hawaiian Homes Commission Act. Loans are for a maximum amount of approximately $453,000 and for a maximum term of 30 years. Interest rates on outstanding loans range up to 10 percent. Total liabilities included notes, bonds, and capital lease obligations totaling $52 million and temporary deposits payable and other liabilities of $48 million.

Auditors’ Opinion

DHHL RECEIVED AN UNMODIFIED OPINION that the financial statements were presented fairly, in all material respects, in accordance with generally accepted accounting principles. DHHL also received an unmodified opinion on its compliance with major federal programs in accordance with the Uniform Guidance.

Findings

THERE WERE NO REPORTED DEFICIENCIES in internal control over financial reporting that are considered to be material weaknesses and no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. There were no findings that are considered material weaknesses in internal control over compliance in accordance with the Uniform Guidance.

About the Department

 

The Hawaiian Homes Commission Act sets aside certain public lands as Hawaiian home lands to be utilized in the rehabilitation of native Hawaiians.  These public lands are managed by the Department of Hawaiian Home Lands (DHHL), a state agency headed by the Hawaiian Homes Commission, whose primary responsibilities are to serve its beneficiaries and to manage this extensive land trust.  DHHL provides direct benefits to native Hawaiians in the form of 99-year homestead leases at $1 per year for residential, agricultural, or pastoral purposes, and financial assistance through direct loans, insured loans, or loan guarantees for home purchase, construction, home replacement, or repair.  In addition to administering the homesteading program, DHHL leases trust lands not in homestead use at market value and issues revocable permits, licenses, and rights-of-entry.  Its financial statements include the public trusts controlled by the Hawaiian Homes Commission.

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Financial and Compliance Audit of the Department of Hawaiian Home LandsSummary
03/27/2020

PHOTO: HAWAII TOURISM AUTHORITY / TOR JOHNSON

AUDITOR’S SUMMARY

Financial Statements, Fiscal Year Ended June 30, 2019

THE PRIMARY PURPOSE of the audit was to form an opinion on the fairness of the presentation of the financial statements for the Hawai‘i Tourism Authority, as of and for the fiscal year ended June 30, 2019. The audit was conducted by Accuity LLP. 


Financial Highlights

FOR THE FISCAL YEAR ended June 30, 2019, HTA reported total revenues of $332.4 million, along with $5 million in transfers from other state departments, and total expenses of $108.3 million. Revenues consisted of $95.5 million from TAT, $9.3 million from charges for services, and interest and other revenues of $3.5 million. HTA also reported the cancellation of approximately $224.1 million in debt service payments on general obligation bonds related to the construction of the Hawai’i Convention Center pursuant to Act 86, Session Laws of Hawai’i 2018, effective July 1, 2018.

 

Total expenses of $108.3 million consisted of $96.4 million for contracts, $7.3 million for depreciation, and $4.6 million for payroll, administrative, and other expenses.

As of June 30, 2019, total assets and deferred outflows of resources of $325.5 million exceeded total liabilities and deferred inflows of resources of $16.5 million, resulting in a net position of $309 million. Total assets and deferred outflows of resources included: (1) cash of $96 million, (2) investments of $3.5 million, (3) land and net capital assets of $196.8 million, and (4) other assets and deferred outflows of resources of $29.2 million.

 

Auditors’ Opinion

HTA RECEIVED AN UNMODIFIED OPINION that its financial statements were presented fairly, in all material respects, in accordance with generally accepted accounting principles.

Findings

THERE WERE NO REPORTED DEFICIENCIES in internal control over financial reporting that were considered to be material weaknesses and no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards.

Special-Purpose Financial Statements for the Hawai‘i Convention Center, as of and for the year ended December 31, 2019, will issue in July.

About the Authority

 

The Hawai‘i Tourism Authority (HTA) is responsible for developing and implementing a strategic tourism marketing plan and developing measures of effectiveness to assess the overall benefits and effectiveness of its marketing plan and its progress toward achieving the agency’s strategic plan goals. HTA is also responsible for the Hawai‘i Convention Center. The primary source of funding for HTA’s operations is the Transient Accommodations Tax (TAT) collected by the State. HTA is governed by a board of directors comprised of 12 voting members, each of whom is appointed by the Governor. HTA was established on January 1, 1999, and is placed within the Department of Business, Economic Development and Tourism for administrative purposes.

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Financial Audit of Hawai‘i Tourism AuthoritySummary
03/25/2020

PHOTO: DEPARTMENT OF LAND AND NATURAL RESOURCES

AUDITOR’S SUMMARY

Financial Statements, Fiscal Year Ended June 30, 2018

THE PRIMARY PURPOSE of the audit was to form an opinion on the fairness of the presentation of the financial statements for the Department of Land and Natural Resources, as of and for the fiscal year ended June 30, 2018. The audit was conducted by N&K CPAs, Inc.


Financial Highlights

FOR THE FISCAL YEAR ended June 30, 2018, DLNR reported total revenues of $207.3 million, along with $5 million in transfers from other state departments, and total expenses and transfers of $184.5 million, resulting in an increase in net position of $23.8 million. Revenues consisted of: (1) $99 million from State appropriations, net of lapses, (2) $49.8 million from charges for services, (3) $28.8 million from operating grants and contributions, (4) $15.2 million from nonimposed employee fringe benefits, (5) $500,000 from capital grants, and (6) $14 million from taxes, interest, and other income.

Total expenses and transfers of $184.5 million consisted of: (1) $78.2 million for environmental protection, (2) $62.1 million for cultural and recreation, (3) $23.6 million for economic development, (4) $10.6 million for government-wide support, (5) $5.2 million for individual rights, and 
(6) $4.3 million for public safety. Total transfers from other sources amounted to $500,000.

As of June 30, 2018, total assets of $821.4 million exceeded total liabilities of $71.8 million by $749.6 million. Total assets included cash of $299.6 million, receivables of $3.7 million, and land and net capital assets of $518.1 million. Total liabilities included vouchers and accrued payables of $21.9 million, amounts due to the State of $10 million, general obligation bonds payable of $36.2 million, and unearned revenues of $3.7 million.

Auditors’ Opinion

DLNR RECEIVED AN UNMODIFIED OPINION that its financial statements were presented fairly, in all material respects, in accordance with generally accepted accounting principles.

Findings

THE AUDITORS IDENTIFIED four material weaknesses in internal control over financial reporting that are required to be reported in accordance with Government Auditing Standards. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected, on a timely basis. The material weaknesses are described on pages 65-70 of the report. The department’s corrective action plan can be found at page 73.

There were no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards.

About the Organization

 

The Department of Land and Natural Resources’ (DLNR) mission is to enhance, protect, conserve, and manage Hawai‘i’s unique and limited natural, cultural and historic resources held in public trust for current and future generations of the people of Hawai‘i. DLNR manages and administers the State’s parks, historical sites, forests, forest reserves, fisheries, wildlife sanctuaries, game management areas, public hunting areas, and natural area reserves and is responsible for nearly 1.3 million acres of state lands, beaches, and coastal waters as well as 750 miles of coastline. DLNR is headed by the Board of Land and Natural Resources.

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Financial Audit of the Department of Land and Natural ResourcesSummary
03/20/2020

PHOTO: O‘AHU METROPOLITAN PLANNING ORGANIZATION

AUDITOR’S SUMMARY

Financial Statements, Fiscal Year Ended June 30, 2019

THE PRIMARY PURPOSE of the audit was to form an opinion on the fairness of the presentation of the financial statements for the O‘ahu Metropolitan Planning Organization, as of and for the fiscal year ended June 30, 2019, and to comply with the requirements of Title 2, U.S. Code of Federal Regulations, Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), which established audit requirements for state and local governmental units that receive federal awards. The audit was conducted by N&K CPAs, Inc.

Financial Highlights

FOR THE FISCAL YEAR ended June 30, 2019, OahuMPO reported total revenues of $2.8 million and total expenses of $2.8 million, resulting in no change in net position. Revenues consisted of $2.2 million from federal grants and $564,000 in contributions from the State of Hawai‘i and City and County of Honolulu.

Total expenses consisted of: (1) $309,000 for transportation forecasting and long-range planning, (2) $568,000 for short-range transportation system and demand management planning, (3) $74,000 for transportation monitoring and analysis, (4) $262,000 for emergency management, and (5) $1.6 million for program coordination and administration.

As of June 30, 2019, total assets exceeded total liabilities by $538,000. Total assets of $1.8 million included cash of $583,000 and receivables and other assets of $1.2 million. Total liabilities totaled $1.2 million.

Auditors’ Opinion

OahuMPO RECEIVED AN UNMODIFIED OPINION that its financial statements were presented fairly, in all material respects, in accordance with generally accepted accounting principles. OahuMPO received a qualified opinion on its compliance with major federal programs in accordance with the Uniform Guidance.

Findings

THERE WERE NO FINDINGS THAT WERE CONSIDERED MATERIAL WEAKNESSES in internal control over financial reporting that would have required reporting under Government Auditing Standards. The auditors identified two deficiencies in internal control over financial reporting that were considered significant deficiencies, one of which is also considered a significant deficiency in internal control over compliance. A significant deficiency is a deficiency, or a combination of
deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. The deficiencies are described on pages 44-47 of the report.

The auditors identified one material weakness and one previously noted significant deficiency in internal control over compliance that are required to be reported in accordance with the Uniform Guidance. A material weakness in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. The material weakness is described on pages 48-49 of the report.

About the Organization

Federal highway and transit statutes require urbanized areas greater than 50,000 in population to designate a metropolitan planning organization as a condition for spending Federal highway or transit funds. O‘ahu Metropolitan Planning Organization (OahuMPO) is the designated metropolitan planning organization for the island of O‘ahu.   OahuMPO was established by agreement between the Governor of the State of Hawai‘i and the Chairperson of the City Council of the City and County of Honolulu and serves as the decision making body responsible for carrying out continuing, comprehensive, and cooperative transportation planning and programming for the island of O‘ahu.

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Financial and Compliance Audit of the O‘ahu Metropolitan Planning OrganizationSummary
02/26/2020

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AUDITOR’S SUMMARY

Financial Statements, Fiscal Year Ended June 30, 2019

THE PRIMARY PURPOSE of the audit was to form an opinion on the fairness of the presentation of the State of Hawai‘i’s financial statements, as presented in the Comprehensive Annual Financial Report (CAFR) for the State of Hawai‘i as of and for the fiscal year ended June 30, 2019. The audit was conducted by Accuity LLP. The CAFR was issued on December 19, 2019.

Financial Highlights

FOR THE FISCAL YEAR ended June 30, 2019, total revenues were $12.7 billion and total expenses were $12.9 billon, resulting in a decrease in net position of $200 million. Approximately 61 percent of the State of Hawai‘i’s total revenues came from taxes of $7.8 billion, 25 percent from grants and contributions of $3.2 billion, and 13 percent from charges for various goods and services of $1.7 billion.

Total tax revenues of $7.8 billion consisted of general excise taxes of $3.8 billion, net income taxes of $2.4 billion, and other taxes of $1.3 billion.

The largest expenses were for lower education at $3.5 billion, welfare at  $3.4 billion, higher education at $1 billion, health at $1 billion, and general government at $1 billion.

As of June 30, 2019, total liabilities and deferred inflows of resources of $27.2 billion exceeded total assets and deferred outflows of resources of $24.8 billion, resulting in a net position of $2.4 billion. Of this amount, $4.9 billion was for the State’s net investment in capital assets, $3.7 billion was restricted for specific programs, and a negative $10.8 billion in unrestricted assets.

As of June 30, 2019, total assets and deferred outflows of resources of $24.8 billion were comprised of (1) net capital assets of $14.2 billion, (2) investments of $3.8 billion, (3) cash of $2 billion, (4) receivables of $1.4 billion, (5) restricted assets of $1.2 billion, and (6) other assets and  deferred outflows of resources of $2.2 billion. Total liabilities and deferred inflows of resources of $27.2 billion were comprised of general obligation and revenue bonds payable of $10.5 billion, vacation and retirement benefits of $14.1 billion, and other liabilities and deferred inflows of resources of $2.6 billion.

Auditors’ Opinion
THE STATE OF HAWAI‘I RECEIVED AN UNMODIFIED OPINION that its financial statements were presented fairly, in all material respects, in accordance with generally accepted accounting principles.

About the State

THE STATE OF HAWAI‘I is mandated by statute to provide a range of services in the areas of education (both lower and higher), welfare, transportation (including highways, airports, and harbors), health, hospitals, public safety, housing, culture and recreation, economic development, and conservation of natural resources.

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Financial Audit of the Comprehensive Annual Financial Report of the State of Hawai‘iSummary
02/21/2020

PHOTO: Office of the Auditor

AUDITOR’S SUMMARY

Sixty-three funds proposed in 2020 did not meet criteria

We reviewed 99 House and Senate bills proposing 63 special and revolving funds during the 2020 legislative session of which none met criteria.

ONLY ABOUT HALF OF THE MONEY the State spends each year comes from its main financial account, the general fund. The other half of expenditures are financed by special, revolving, federal, and trust funds.  Over the past ten years, the number of these non-general funds and the amount of money contained in them have substantially increased. Much of this upward trend has been caused by an increase in special funds, which are funds set aside by law for a specified object or purpose.

In 2013, the Legislature amended Section 23-11, Hawai‘i Revised Statutes (HRS), after the Auditor recommended changes to stem a trend in the proliferation of special and revolving funds over the past 30 years. Such funds erode the Legislature’s ability to control the State budget through the general fund appropriation process. General funds, which made up about two-thirds of State operating budget outlays in the late 1980s, had dwindled to about half of outlays.

By 2011, special funds amounted to $2.48 billion, or 24.3 percent, of the State’s $10.2 billion operating budget. Also ballooning were revolving funds, which are used to pay for goods and services and are replenished through charges to users of the goods and services or transfers from other accounts or funds. By 2011, revolving funds made up $384.2 million, or 3.8 percent, of the State’s operating budget. Further hampering the Legislature’s control over the budget process was a 2008 court case. In Hawai‘i Insurers Council v. Linda Lingle, Governor of the State of Hawai‘i, the Hawai‘i Supreme Court determined that under only certain conditions could the Legislature “raid” special funds to balance the State budget.  In 2013, in order to gain more control over the budget process, the Legislature built new safeguards into the criteria for establishing special funds.

Despite the new criteria, special and revolving funds persist: in FY2020, the general fund comprised 52 percent of the State operating budget, with special and revolving funds comprising 23 percent, or $3.37 billion.

The Issue
NON-GENERAL FUNDS, such as special, revolving, federal, and trust funds, exist outside the State’s main financial account, the general fund.  Since FY2008, the number of non-general funds and the amount of money contained in them have substantially increased. In FY2020, non-general funds accounted for about half of the State’s $14.4 billion operating budget.  This proliferation of non-general funds has hampered the Legislature’s ability to direct general fund spending.

The Criteria

SECTION 23-11, HRS,
requires the Auditor to analyze all bills proposing to establish new special or revolving funds according to the following criteria:

1. The need for the fund, as demonstrated by:

  • The purpose of the program to be supported by the fund;
  • The scope of the program, including financial information on fees to be charged, sources of projected revenue, and costs; and
  • An explanation of why the program cannot be implemented successfully under the general fund appropriation process; and

2. Whether there is a clear nexus between the benefits sought and charges made upon the program users or beneficiaries or a clear link between the program and the sources of revenue, as opposed to serving primarily as a means to provide the program or users with an automatic means of support that is removed from the normal budget and appropriation process.

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Report No. 20-04, Overview of Proposed Special and Revolving Fund AnalysesSummary
02/05/2020
Picture of building at UH campus

Photo: University of Hawai‘i

Six funds did not meet criteria.

WE REVIEWED 70 FUNDS AND ACCOUNTS administered by the University of Hawaiʻi (UH). We found three  special funds and three revolving funds did not meet criteria. We recommended one special fund be  reclassified as a revolving fund; one revolving fund be reclassified as a trust account; and two special funds and two revolving funds be repealed.

Section 23-12, Hawai‘i Revised Statutes (HRS), requires the Auditor to review all existing special, revolving, and trust funds every five years.  Reviews are scheduled so that each department’s funds are reviewed once every five years. Although not mandated by statute, we include trust accounts as part of our reviews. This is our sixth review of UH’s revolving funds, trust funds, and trust accounts, and our second review of UH’s special funds.

We use criteria developed by the Legislature, the Department of Accounting and General Services, and by our office based on public finance and accounting literature. For each fund, we present a five-year financial summary, the purpose of the fund, and conclusions about its use. Financial data is provided for informational purposes and has not been audited. We do not present conclusions about the effectiveness of programs or their management, or whether the programs should be continued.

Reporting shortfall
WE NOTED THAT UH did not file statutorily required reports for  nongeneral funds with balances totaling $8,932,000 and for  administratively created funds with balances totaling $108,996,000. Accurate and complete reporting provides important information to legislators about an agency’s financial position.

Agency response
THE DEPARTMENT DISAGREED with our assessment that one special fund did not meet its criteria, which is the same determination that we reached in our 2014 review of UH’s funds. We maintain that the fund does not meet the criteria of a special fund because it functions as, and meets the criteria for, a revolving fund and should be reclassified.

As to our observations on UH’s reporting of non-general funds, UH stated that it was an oversight and that UH has begun to include previously excluded non-general funds in its reports to the Legislature.


FUND TYPES

SPECIAL FUNDS
are used to account for revenues earmarked for particular purposes and from which expenditures are made for those purposes.

REVOLVING FUNDS
such as loan funds, are often established with an appropriation of seed money from the general fund, and must demonstrate the capacity to be self-sustaining.

TRUST FUNDS
such as a pension fund, invoke the State’s fiduciary responsibility to care for and use the assets held to benefit those with a vested interest in the assets.

TRUST ACCOUNTS
are typically separate holding or clearing accounts and are often used as accounting devices for crediting or charging state agencies or projects for payroll and other costs.

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Report No. 20-03, Review of Special Funds, Revolving Funds, Trust Funds, and Trust Accounts of the University of Hawai‘iSummary
01/24/2020
young women working and used computer, working concept.

Photo: istock.com

IN REPORT NO. 15-13, Study of State Departmental Engineering Sections That Manage Capital Improvement Projects, the Auditor concluded that decentralized capital improvement project (CIP) engineering divisions serve the public’s interest and recommended the Legislature adopt policy changes that provide state departments and executive agencies with consistent policies for project management. The recommendations from our 2015 report were subsequently formalized in the Hawai‘i Revised Statutes, along with annual training requirements introduced by the 2016 Legislature. For Report No. 20-02, Report on Compliance with Statutory Requirements Based on Report No. 15-13, Study of State Departmental Engineering Sections That Manage Capital Improvement Projects, we revisited the departments and agencies that were surveyed in 2015 to determine whether they implemented our recommendations, as requested by the 2019 Legislature in House Concurrent Resolution No. 193, Senate Draft 1.

Change in Methodology Raises the Bar
Our 2015 report recommended that department and agency CIP programs could better align with best practices by (1) adopting basic, uniform procedures for maintaining timelines, (2) tracking expenditures and deliverables, and (3) involving stakeholders in project development –
all of which are now required by statute. We also attempted to determine agencies’ compliance with required annual CIP training from the Department of Accounting and General Services (DAGS). We assessed compliance with these requirements through agencies’ self-reported survey responses, as we did in 2015; however, for this report, we also verified those responses through independent reviews of supporting documents such as sample schedules, timelines, and project feedback. Under this more rigorous review, some departments and agencies deemed compliant with recommended best practices in 2015 were generally found non-compliant with comparable statutorily-required practices. 

Departments Demonstrate Low Level of Compliance
Overall, we determined no agency had implemented all three statutory requirements. It is difficult to pinpoint whether this low level of compliance is due to departments being unaware or unclear about the requirements, or if there were other contributing factors. We encourage DAGS and affected departments and agencies to discuss both requirements and strategies to improve compliance.

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Report No. 20-02, Report on Compliance with Statutory Requirements Based on Report No. 15-13, Study of State Departmental Engineering Sections That Manage Capital Improvement ProjectsSummary
01/14/2020
Waikiki Beach and Diamond Head Crater including the hotels and buildings in Waikiki, Honolulu, Oahu island, Hawaii. Waikiki Beach in the center of Honolulu has the largest number of visitors in Hawaii

Photo: istock.com

Nine funds and accounts did not meet criteria.

WE REVIEWED 69 FUNDS AND ACCOUNTS administered by the Department of Business, Economic Development and Tourism (DBEDT) and reported on 38 of them. We found six revolving funds, one special fund, and two trust accounts did not meet criteria. We recommended four revolving funds and one trust account be reclassified as special funds; one trust account be closed; and one revolving fund be repealed. We also recommended that the department confer with the Legislature to find a more appropriate vehicle to hold and expend moneys in a revolving fund and a special fund, both of which are supported only through appropriations from the general fund.

Section 23-12, Hawai‘i Revised Statutes (HRS), requires the Auditor to review all existing special, revolving, and trust funds every five years. Reviews are scheduled so that each department’s funds are reviewed once every five years. Although not mandated by statute, we include trust accounts as part of our reviews. This is our sixth review of DBEDT’s revolving funds, trust funds, and trust accounts, and our second review of DBEDT’s special funds.

We use criteria developed by the Legislature, the Department of Accounting and General Services, and by our office based on public finance and accounting literature. For each fund, we present a five-year financial summary, the purpose of the fund, and conclusions about its use. Financial data is provided for informational purposes and has not been audited. We do not present conclusions about the effectiveness of programs or their management, or whether the programs should be continued.

Reporting shortfall
WE NOTED THAT DBEDT did not file statutorily required reports for non-general funds with balances totaling $5,752,000 and for administratively created funds with balances totaling $752,000. Accurate and complete reporting provides important information to legislators about an agency’s financial position.

Agency response
THE DEPARTMENT DISAGREED with our assessment that one revolving fund did not meet its criteria, which is the same determination that we reached in our 2009 and 2014 reviews of DBEDT’s funds. We maintain that the fund does not meet the criteria of a revolving fund because there is no nexus or linkage between the fund and sources of revenue and believe that the fund should be reclassified as a special fund. The department also questioned our conclusion that three other revolving funds did not meet the statutory criteria; however, we are unclear as to the basis of DBEDT’s disagreement. We believe that our analyses and conclusions with respect to those funds are appropriate.

As to our other observations, DBEDT stated that the department will take steps to ensure compliance with reporting requirements for non-general funds and for administratively created funds.


FUND TYPES

SPECIAL FUNDS
are used to account for revenues earmarked for particular purposes and from which expenditures are made for those purposes.

REVOLVING FUNDS
such as loan funds, are often established with an appropriation of seed money from the general fund, and must demonstrate the capacity to be self-sustaining.

TRUST FUNDS
such as a pension fund, invoke the State’s fiduciary responsibility to care for and use the assets held to benefit those with a vested interest in the assets.

TRUST ACCOUNTS
are typically separate holding or clearing accounts and are often used as accounting devices for crediting or charging state agencies or projects for payroll and other costs.

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Report No. 20-01, Review of Special Funds, Revolving Funds, Trust Funds, and Trust Accounts of the Department of Business, Economic Development and TourismSummary
12/27/2019

Teal Ribbon, Ovarian Cancer, cervical Cancer, and sexual assault awarenessShould Support Services Be Mandatory?
Three largest insurers claim to already provide coverage, but lack of relevant data on claims and reimbursement hindered assessment.

HOUSE BILL NO. 484, introduced during the 2019 legislative session, would require health insurers to provide clinical victim support services coverage to victims of sexual violence and abuse. The services are defined in the bill as follows:
• Coordinating with other health care providers;
• Assisting victims of sexual violence in obtaining appropriate government entitlements, access, insurance coverage, and other appropriate programs and services offered by government agencies and community organizations; and
• Coordinating with schools, employers, and other individuals and entities concerning a victim of sexual violence.

Survey data collected by the Centers for Disease Control (CDC) from 2010 through 2012 found more than 33 percent of women in Hawai‘i experienced some form of contact sexual violence during their lifetime, and nearly 15 percent had experienced rape or attempted rape. Because sexual violence can lead to injuries, post-traumatic stress disorder, reproductive health issues, and other mental health and functional impairments, the proposed legislation would make coverage of services defined in the bill mandatory, such as interventions by licensed mental health professionals and coordination with non-medical providers. For Report No. 19-17, Study of Proposed Mandatory Health Insurance for Clinical Victim Support Services for Victims of Sexual Violence and Abuse, we surveyed commercial health plan providers that collectively insure about 90 percent of the state population. The three largest insurers, whose members account for about 73 percent of state residents, responded that the services described in House Bill No. 484 are already covered. Changes in policy designed to facilitate reimbursement for these services are a relatively recent development, however. This, coupled with a lack of relevant data, presented challenges to assessment.  

Social and Financial Impacts of House Bill No. 484
State law requires the Auditor to conduct an impact assessment before the Legislature can consider any measure mandating health insurance coverage for a specific health service, disease, or provider. Senate Concurrent Resolution No. 171, Senate Draft 1, asked the Auditor to assess the social and financial effects of requiring health insurers to include clinical support services for victims of sexual violence and abuse coverage under their individual and group policies. We were unable to determine the number of sexual violence victims who received any clinical support services specified in House Bill No. 484; more generally, however, three of the four 24/7 statewide sexual violence service providers reported serving a total of 1,579 victims in 2017 and 1,614 in 2018. A new policy implemented by the State’s largest insurer in January 2019 identified a medical code that licensed mental health providers can use to bill for support services provided to victims of sexual assault, and the second largest insurer plans to do the same. The medical code will make it easier to determine how many victims of sexual violence and abuse obtain support services.

In terms of financial impact, most insurers surveyed said mandated coverage would likely increase the cost of services, but none provided an estimate. The State’s Insurance Commissioner testified the proposed coverage mandate could be construed as an additional benefit under the State’s essential health benefits, which would obligate the State to defray the cost.

Recommendation
We were unable to determine how many sexual violence victims received, or are currently receiving, support services as described in House Bill
No. 484. However, the State’s three largest providers, who insure 73 percent of Hawai‘i residents, stated those services are already covered. Once the State’s two largest insurers both have medical codes in place, they will be able to track how often the services are being provided and billed for, and whether the claims are being approved by insurers. This data will be helpful to the Legislature if it considers mandating health insurance coverage for these support services in the future.

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Report No. 19-17, Study of Proposed Mandatory Health Insurance for Clinical Victim Support Services for Victims of Sexual Violence and AbuseSummary
11/21/2019

Six funds and accounts did not meet criteria.

WE REVIEWED 21 FUNDS AND ACCOUNTS administered by the Department of the Attorney General (AG) and reported on 19 of them. We found two revolving funds, two trust funds, and two trust accounts did not meet criteria. We recommended two revolving funds and one trust fund be reclassified as special funds; one trust fund be reclassified as a trust account; one trust account be reclassified as a trust fund; and one trust account be closed.

Section 23-12, Hawai‘i Revised Statutes (HRS), requires the Auditor to review all existing special, revolving, and trust funds every five years. Reviews are scheduled so that each department’s funds are reviewed
once every five years. Although not mandated by statute, we include
trust accounts as part of our reviews. This is our sixth review of AG’s revolving funds, trust funds, and trust accounts, and our second review of AG’s special funds.

We use criteria developed by the Legislature, the Department of Accounting and General Services, and by our office based on public finance and accounting literature. For each fund, we present a five-year financial summary, the purpose of the fund, and conclusions about its use. Financial data is provided for informational purposes and has not been audited. We do not present conclusions about the effectiveness of programs or their management, or whether the programs should be continued.

Reporting shortfall
WE NOTED THAT AG did not file statutorily required reports for non-general funds with balances totaling $84,000 and for administratively created funds with balances totaling more than $1 million. Accurate and complete reporting provides important information to legislators about an agency’s financial position.

Agency response
THE DEPARTMENT DISAGREED with our assessment that four funds and one account did not meet their respective criteria; however, we maintain that our analyses and conclusions are appropriate. A detailed response to AG’s position is included with the report.

As to our other observations, AG stated that the department will take steps to ensure compliance with reporting requirements and provide internal training to ensure transfers are correctly classified.


FUND TYPES

SPECIAL FUNDS
are used to account for revenues earmarked for particular purposes and from which expenditures are made for those purposes.

REVOLVING FUNDS
such as loan funds, are often established with an appropriation of seed money from the general fund, and must demonstrate the capacity to be self-sustaining.

TRUST FUNDS
such as a pension fund, invoke the State’s fiduciary responsibility to care for and use the assets held to benefit those with a vested interest in the assets.

TRUST ACCOUNTS
are typically separate holding or clearing accounts and are often used as accounting devices for crediting or charging state agencies or projects for payroll and other costs.

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Report No. 19-16, Review of Special Funds, Revolving Funds, Trust Funds, and Trust Accounts of the Department of the Attorney GeneralSummary
09/24/2019
Book and colored pencil on school table

Photo: istock.com

LOCAL GOVERNMENTS COLLECT IMPACT FEES to offset the cost of new and expanded public facilities needed to serve new residential developments. Hawai‘i’s school impact fee law, codified as Sections 302A-1601 through 302A-1612, Hawai‘i Revised Statutes (HRS), requires that all builders of new residential units within a designated school impact district pay impact fees – individual home builders and large developers alike. The law sets forth formulas for calculating school impact fees, which include land for new schools (or fees in lieu of land) and a percentage of the estimated cost to build new schools.

What we found
In Report No. 19-13, Audit of the Department of Education’s Administration of School Impact Fees, we examined the Department of Education’s (DOE) assessment, collection, and accounting of school impact fees. We found that the department has no written policies and procedures for the selection of potential school impact districts, the factors that should be considered in determining the size of potential districts, or oversight and review of this process. The DOE does not begin assessing school impact fees immediately upon the Board of Education’s designation of a school impact district, sometimes waiting months before beginning collection.

In addition, the department is dependent on the cooperation of county building departments to enforce the impact school fee law. It has not promulgated administrative rules to proscribe the process it intends the counties to follow before issuing building permits for new residential construction in an impact fee district. According to the Deputy Director of the City and County of Honolulu’s Department of Planning and Permitting, without any formal agreement in place, they have simply been “accommodating” the DOE’s request to help implement the school impact fee law. In the case of the West Hawai‘i school impact district, which was the first to be designated in April 2010, Hawai‘i County decided not to cooperate. The DOE suspended implementation of the district shortly thereafter, even though the county is prohibited by law from issuing building permits for new residential construction in impact fee districts until the DOE has confirmed that the applicant has satisfied the school impact fee requirements.

How did these problems occur?
The DOE delegates the responsibility for establishing impact fee district boundaries and the amount of the impact fees to be assessed in the particular district to a single employee, a Land Use Planner, who has not been provided administrative rules, written policies, or formal procedures for guidance. Instead, the planner explained that designating districts is a matter of being “intuitive” or having a “feel” for the general development climate based on media reports and “keeping an ear to the ground.” The Public Works Manager, who supervises the program, clarified that the process involved the use of “professional judgement,” a matter of staff tapping years of experience of working in real estate development.

Neither the Land Use Planner nor the Public Works Manager, however, could recreate the specific factors they considered in evaluating the need for new schools or additional classrooms, the timing of such reviews,
or other material aspects of their analyses. These inconsistencies were especially apparent in the department’s calculation of school impact fees, which at times was based on questionable assumptions. For example, in the case of the Kalihi-Ala Moana (KAM) district, the department made
a number of “urban exceptions” to account for the lack of available and affordable real estate. Despite these adjustments, the resultant school impact fee of $9,374 was two to four times higher than the fees for the other districts. Subsequent workarounds and adjustments, including a change to a Board of Education policy on acreage requirements for new schools, eventually reduced the fee to $3,864.

In regard to these efforts, the Public Works Manager was not convinced the new policy could stand without further study. “I’m not convinced that a policy like this is defensible,” he said.

Why do these problems matter?
Since 2007, only $5.3 million in school impact fees have been collected – a fraction of the $80 million to $100 million the DOE estimates it needs to build a single school. The DOE’s inconsistent and problematic implementation of the school impact fee law calls into question the relevance and appropriateness of the fees that have been collected to date. The delay in assessing school impact fees from residential developers in the KAM impact fee district alone allowed developers to avoid paying school impact fees relating to 32 building permit applications, representing a total of 2,806 planned residential units. Based on an all-cash fee of
$3,864 per unit for the KAM district, we estimate that nearly $11 million in potential fee revenue was not collected by the department.

The designated district boundaries raise further questions about whether they satisfy the constitutional requirement that there be a “nexus,” or reasonable connection, between the development of new residential units and the need for additional classroom capacity.

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Report No. 19-13, Audit of the Department of Education’s Administration of School Impact FeesSummary
06/27/2019

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THE DEPARTMENT OF LAND AND NATURAL RESOURCES’ (DLNR) land portfolio contains more than 1,600 income-generating properties that produce substantial revenue through the issuance of long-term leases and one-year revocable permits. Those proceeds are held with other revenues in the Special Land and Development Fund (SLDF), which DLNR relies on to fully fund its Land Division, the Office of Conservation and Coastal Lands, and the Engineering Division’s Dam Safety and Geothermal programs, as well as supplement the budgets of other offices and divisions within the agency. Since it was statutorily created in 1962, the SLDF has become
a critical funding source for natural disaster response, hazard mitigation, and conservation programs, as well as providing state matching funds for federally funded endangered species and invasive species initiatives.
What we found
Our audit focused on the Land Division’s management of its public lands and its administration of the SLDF. We found the Land Division lacking in both areas. Specifically, the Land Division does not have a strategic plan for the long-term management of its public lands, an asset management plan to optimize revenue in keeping with its public trust obligations, and clear and coherent policies and procedures to guide its day-to-day operations. The absence of long-range planning has left the Land Division staff without the expertise, resources, and options to actively and effectively manage its land portfolio. Not only is the division ill-prepared to take advantage of opportunities to enhance revenues for the State, the division cannot perform two core lease management functions: collecting delinquent rent and performing annual field inspections. Due to these shortcomings, lease extensions have become the norm, which potentially benefits a few lessees at the cost of foregoing substantial state revenues and denying the wider public new opportunities to lease state land. Similarly, most of the Land Division’s “temporary” revocable permits are decades old, which has allowed a number of tenants to continue using thousands of acres of public land, many at less than fair market rates.
When it comes to administration of the SLDF, we found DLNR does not accurately account for moneys in the special fund and underreported cash balances to the 2018 Legislature by more than $1.5 million. It has also allowed more than $1.5 million to sit idle in the SLDF for more than five years.

How did these problems occur?
The Land Division Administrator believes that Chapter 171, Hawai‘i Revised Statutes, provides all the guidance the division needs to manage its public lands, so he does not see the need for administrative rules or written policies and procedures. He also does not see the benefit in long-range planning, as the division’s direction can shift whenever there is a change in administration or board composition. But this short-range thinking has left the Land Division unprepared to strategically grow its income in terms of staffing, expertise, and resources; for instance, land agents are trained to issue ground leases, but not space leases that could yield higher rents.
The Land Division and the Land Board have been entrusted with public lands and, per
the Attorney General, have a fiduciary duty to manage that trust solely in the interest
of its beneficiaries, the people of Hawai‘i; to deal impartially when there is more than
one beneficiary; and to use reasonable skill and care to make trust property productive. Some Board of Land and Natural Resources members seem to misunderstand their
public trust responsibilities, however. They do not believe these responsibilities include maximizing income to the extent possible. Rather, they cite the need for balance, fairness, reasonableness, and retention of good tenants, which we believe is putting the interests of individual lessees above those of the rest of the public.
The Land Division, meanwhile, has already missed opportunities to increase income for the State. For example, when 70 leases in the Kanoelehua Industrial Area on Hawai‘i Island began expiring in 2014, the Land Division had an opportunity to consolidate and re-subdivide properties to meet growing demand for 2- to 3-acre parcels, as well as to let the ground leases expire and be converted to space leases. By our calculation, extending just 16 of the leases instead meant the State lost out on $1.6 million in potential revenue. In addition, by not adjusting rents as required by statute, many tenants are paying well-below market rates. An appraisal of just 113 of the Land Division’s 340 revocable permits by CBRE, Inc., showed the Land Division’s rent was nearly $838,000 below market rates.
We further found that DLNR misunderstands its own special fund, which is reflected in its reports to the Legislature. For instance, DLNR reported that the SLDF is comprised of only two accounts when it is, in fact, comprised of 25 accounts. Compounding matters, we determined that DLNR did not report 15 of the SLDF sub-accounts on its non-general funds report to the Legislature, consequently understating the total SLDF balance by more than $1.5 million and preventing the Legislature from considering the use of excess moneys for other public purposes.
Why do these problems matter?
DLNR and the Land Board’s inability to do anything but maintain the status quo has led to a loss of revenue for the State, as well as a loss of opportunities for potential lessees to lease public lands. Further, special funds are created for specific programs and purposes and cannot be used for anything else. Inaccurate reporting obscures whether the funds are being used appropriately, as well as if there are excess moneys that could be moved into the general fund to address other priorities within and outside of DLNR.

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Report No. 19-12, Audit of the Department of Land and Natural Resources’ Special Land and Development FundSummary
05/03/2019

 

Baker Tilly reviewed 150 of the 1,070 invoices processed by HART in fiscal years 2017 and 2018.  Valued at $205,210,198, the invoices in the test population represent 31 percent of the costs HART incurred during that two-year period.

Photo: Honolulu Authority for Rapid Transporation

AUDITOR’S SUMMARY

 

ACT 1, passed by the Hawai‘i State Legislature during the 2017 First Special Session, requires the Auditor to audit the financial records of the Honolulu Authority for Rapid Transportation (HART) and analyze its financial management. We contracted with professional services firm Baker Tilly Virchow Krause, LLP (Baker Tilly) to examine HART’s contractor invoice review and payment processes for compliance with documented policies and procedures, as well as the rail authority’s enforcement of contract billing terms and conditions.

Baker Tilly prepared the Honolulu Authority for Rapid Transportation: Contract and Vendor Compliance Review Report. It is the fourth report on HART’s financial management in accordance with Act 1.

For this audit, Baker Tilly reviewed 150 of the 1,070 invoices processed by HART in fiscal years 2017 and 2018 (July 1, 2016-June 30, 2018). Valued at $205,210,198, the invoices in the test population represent 31 percent of the costs HART incurred during that two-year period. Baker Tilly found that HART’s review and payment of contractor and consultant invoices was, generally, consistent with HART’s documented payment application procedures. However, Baker Tilly noted certain errors and inconsistencies that are reported as “observations” in the report. Although the financial impact of the observations appears relatively insignificant, we note that the reported “leakage” of public funds is based on a very small sample of invoices and, irrespective of the amount, constitutes “overspending” of public funds. Baker Tilly did not perform work to assess whether the issues reported about HART’s administration of certain contracts and payments under those contracts existed prior to the test period or are applicable to other contracts that were outside of Baker Tilly’s scope of work.

Specifically, Baker Tilly found that HART paid an additional $21,302 in labor charges to contractor Lea + Elliott, Inc. (Lea + Elliott) in 2015. Based on
Lea + Elliott’s audited overhead rate for that year, HART could have required Lea + Elliott to apply that rate for its 2015 indirect project costs, which would have resulted in a credit of $21,302 to HART. However, because the difference between the provisional and audited overhead rates was less than 3 percent, HART chose not to require a credit of the amount “overpaid” and allowed
Lea + Elliott to continue to use the 2014 labor rate for 2015.

Baker Tilly found that HART allowed Lea + Elliott to provisionally use that same labor rate for 2016, resulting in an additional $102,655 in costs. HART represents that the 2017 audited overhead rate results in another $34,312 of costs, and that it intends to reconcile the audited overhead rates for 2016 and 2017 through an amendment to the contract as well as the 2015 and prior years’ audited overhead rates. According to HART, Lea + Elliott has agreed to credit $21,302 to HART.

Baker Tilly also reviewed 8 of the 40 invoices submitted by HDR Engineering, Inc. (HDR) during the audit period and determined HDR had overcharged HART $5,143 by applying the wrong billing rate in 12 of the 100 labor transactions in the test sample. HART did not detect the errors in its invoice review process and is seeking reimbursement.

Baker Tilly test sample represents a tiny fraction of the estimated $9.188 billion it will cost to complete the rail project, and the overages in this report are correspondingly small. However, Baker Tilly’s observations did demonstrate the potential for error. To restore confidence in this project, HART should be more diligent and mindful about how it manages public money.

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Honolulu Authority for Rapid Transportation: Contract and Vendor Compliance Review ReportSummary
03/12/2019

 

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AUDITOR’S SUMMARY

Eighty funds proposed in 2019 did not meet criteria

We reviewed 98 House and Senate bills proposing 80 special and revolving funds during the 2019 legislative session of which none met criteria.

ONLY ABOUT HALF OF THE MONEY the State spends each year comes from its main financial account, the general fund. The other half of expenditures are financed by special, revolving, federal, and trust funds. Over the past ten years, the number of these non-general funds and the amount of money contained in them have substantially increased. Much of this upward trend has been caused by an increase in special funds, which are funds set aside by law for a specified object or purpose.

In 2013, the Legislature amended Section 23-11, Hawai‘i Revised Statutes, (HRS), after the Auditor recommended changes to stem a trend in the proliferation of special and revolving funds over the past 30 years. Such funds erode the Legislature’s ability to control the State budget through the general fund appropriation process. General funds, which made up about two-thirds of State operating budget outlays in the late 1980s, had dwindled to about half of outlays.

By 2011, special funds amounted to $2.48 billion, or 24.3 percent, of the State’s $10.2 billion operating budget. Also ballooning were revolving funds, which are used to pay for goods and services and are replenished through charges to users of the goods and services or transfers from other accounts or funds. By 2011, revolving funds made up $384.2 million, or 3.8 percent, of the State’s operating budget.

Further hampering the Legislature’s control over the budget process was a 2008 court case. In Hawai‘i Insurers Council v. Linda Lingle, Governor of the State of Hawai‘i, the Hawai‘i Supreme Court determined that under only certain conditions could the Legislature “raid” special funds to balance the State budget. In 2013, in order to gain more control over the budget process, the Legislature built new safeguards into the criteria for establishing special funds.

Despite the new criteria, special and revolving funds persist: in FY2019, the general fund comprised 52 percent of the State operating budget, with special and revolving funds comprising 23 percent or $3.29 billion.

The Issue
NON-GENERAL FUNDS, such as special, revolving, federal, and trust funds, exist outside the State’s main financial account, the general fund. Since FY2008, the number of non-general funds and the amount of money contained in them have substantially increased. In FY2019, non-general funds accounted for about half of the State’s $14.3 billion operating budget, an increase of 22 percent from FY2008. This proliferation of non-general funds has hampered the Legislature’s ability to direct general fund spending.

The Criteria

SECTION 23-11, HRS,
requires the Auditor to analyze all bills proposing to establish new special or revolving funds according to the following criteria:

1. The need for the fund, as demonstrated by:

  • The purpose of the program to be supported by the fund;
  • The scope of the program, including financial information on fees to be charged, sources of projected revenue, and costs; and
  • An explanation of why the program cannot be implemented successfully under the general fund appropriation process; and

2. Whether there is a clear nexus between the benefits sought and charges made upon the program users or beneficiaries or a clear link between the program and the sources of revenue, as opposed to serving primarily as a means to provide the program or users with an automatic means of support that is removed from the normal budget and appropriation process.

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Report No. 19-10, Overview of Proposed Special and Revolving Fund AnalysesSummary
03/07/2019

Should Home Inspectors Be Regulated?

We found no evidence that regulation of home inspectors was reasonably necessary to protect consumers.

PHOTO: istock.com

AUDITOR’S SUMMARY

DURING THE 2018 LEGISLATIVE SESSION, concern that a number of residential home inspections are conducted by under-qualified inspectors led to the introduction of Senate Bill No. 2403, which proposed licensure and regulation for businesses and individuals that provide home inspection services in Hawai‘i. To determine whether regulation is warranted under the criteria of the Hawai‘i Regulatory Licensing Reform Act, Chapter 26H, Hawai‘i Revised Statutes (HRS), the Legislature adopted Senate Concurrent Resolution No. 27, Senate Draft 1, which requested that the Auditor conduct a sunrise review of the proposed regulation. .

As of November 2018, Hawai‘i was one of 17 states that does not regulate its home inspection industry. According to the Hawai‘i Association of Realtors, home inspections are conducted for the majority of residential real estate transactions, typically initiated by home buyers who want to know a property’s condition before committing to what could be the single largest purchase of their life. Contracting the services of a qualified home inspector may be a home buyer’s first line of defense.

In Report No. 19-09, Sunrise Analysis: Regulation of Home Inspectors, we evaluated whether the profession of home inspecting should require licensing and regulation by the State of Hawai‘i. Our analysis compared the regulation of home inspectors proposed in Senate Bill No. 2403 against criteria provided in the Hawai‘i Regulatory Licensing Reform Act. The law states that regulation shall be undertaken only where reasonably necessary to protect the health, safety, and welfare of the consumer of services.

A home inspection is primarily an observation-based, non-invasive review of a residential property that culminates in a written report describing any identified defects. In our review, we found no documented complaints about home inspection businesses or individuals filed with state agencies such as the Office of Consumer Protection, or with non-government organizations like the Better Business Bureau. This lack of data hindered our ability to assess the safety of current industry practices; however, we found no evidence of abuse by home inspectors or that the work of a home inspector reasonably affects the health, safety, and welfare of a home buyer.

Further, we found that home inspectors’ work is limited and not intended to assess whether a property complies with local building codes. When potential issues are identified, the homebuyer must often hire another qualified, licensed professional to provide services that go beyond a home inspection. Based on the limited scope of work that home inspectors perform, and an absence of reported complaints, we are unable to conclude that regulation of home inspectors is “reasonably necessary to protect the health, safety, or welfare of consumers,” nor can we conclude that the health, safety, or welfare of consumers may be “jeopardized” by the nature of home inspection services.

Based on our assessment, we did not find evidence sufficient to meet the criteria under Section 26H-2, HRS, to require the regulation of home inspectors to protect the health, safety or welfare of consumers.

Hawai’i Regulatory Licensing Reform Act

The Hawai‘i Regulatory Licensing Reform Act requires the Auditor
to analyze proposed regulatory measures that, if enacted, would subject unregulated professions and vocations to licensing or other regulatory controls. The policies that the Legislature adopted regarding regulation of professions and vocations are as follows:

The State may regulate professions and vocations only where reasonably necessary to protect the health, safety, or welfare of consumers, and not that of the regulated profession
or vocation;

The State must regulate professions or vocations when the health, safety, or welfare of the consumer may be jeopardized by the nature of the service offered by the provider;

Evidence of abuses by providers of the service must be given great weight in determining whether regulation is desirable;

Regulation must be avoided if it will artificially increase the cost of goods and services to consumers, except in cases where this cost is exceeded by the potential danger to the consumer;

Regulation must not unreasonably restrict entry into professions and vocations by all qualified persons; and

Aggregate costs for regulation and licensure must not be less than the full costs of administering that program.

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Report No. 19-09, Sunrise Analysis: Regulation of Home InspectorsSummary
03/06/2019

Beyond Redemption: After more than a decade, the Department of Health still has not developed procedures to address the Deposit Beverage Container Program’s fundamental flaws.

In such a flawed system without controls, there are no incentives for accurate reporting. In fact, inherent to this system are incentives to under-report the number of bottles and cash at the front end of the system and over-report the amount of bottles being recycled at the back end.

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AUDITOR’S SUMMARY

SECTION 342G-17, Hawai‘i Revised Statutes, requires the Office of the Auditor to conduct a management and financial audit of the Deposit Beverage Container Program in fiscal years ending in even-numbered years. We contracted KMH LLP (KMH), a certified public accounting firm, to conduct this financial and program audit for the fiscal year ended June 30, 2018.

What Did We Find? As in the prior years’ audits, we found that the program has failed to develop and execute procedures to verify the accuracy and completeness of data used to support claims of the deposit and container fees paid to the program by the distributors as well as deposits and handling fees paid to the redemption centers. Without such procedures, the program relies on self-reported data and accepts that cash receipts from the distributors and payments made to redemption centers are accurate and complete. As a result, KMH’s testing found inaccuracies and possible fraudulent reporting in the data used in the aforementioned calculations. For example, during KMH’s detailed testing of 24 distributors, KMH found exceptions in six distributors’ records supporting their claims about the number of beverage containers. One distributor did not respond to KMH’s request for supporting records or schedules. Two others could not provide information on container count, container fee, and deposit amounts. As a result, KMH could not fully complete its testing.

In early October 2018, KMH performed 15 unannounced visits at 10 different redemption center locations throughout the State to verify that they were in compliance with the law. In 2 of the 15 visits, the amount of money KMH was paid for redeeming recyclable materials was significantly less than the amounts recorded in the redemption center’s cash receipt log, which appeared to have been altered. DOH had reimbursed the redemption center the inflated amount. Both of the discrepancies were at the same redemption center location.

Why Did These Problems Occur? The program is essentially an honor system, relying upon outside reporting by interested parties to account for the flows of bottles and cash: Beverage distributors, which are responsible for accounting for the bottles and deposits entering the system, are entrusted to self-report their own numbers as they pay into the State’s Deposit Beverage Container Deposit Special Fund accordingly. Redemption centers, responsible for both refunding deposits to consumers and reporting the number of bottles redeemed in order to collect reimbursements from the State, also self-report and are in turn paid based on those unverified numbers. In such a flawed system without controls, there are no incentives for accurate reporting. In fact, inherent to this system are incentives to under-report the number of bottles and cash at the front end of the system and over-report the amount of bottles being recycled at the back end.

Why Do These Problems Matter? The program is entirely dependent upon reports from distributors and redemption centers to account for the number of containers in the system and the number of containers redeemed. The program has no way of accurately accounting for that inventory. The program has delegated accounting control of the inventory to the redemption centers and relies on an honor system, which has been repeatedly breached. At present, there is no system in place to verify the accuracy and integrity of the reports received from distributors and redemption centers. Without accurate, verifiable deposit beverage container records, the true cost of the program cannot be ascertained. Moreover, if the program is under-collecting beverage container deposits from distributors, then the program may not be financially self-sustaining; if the program is overpaying redemption claims, paying more than once for stolen and resubmitted containers, or paying handling fees for containers that are not shipped to end-use recyclers, then the cost of the program may be far more than is justified.

Redemption center altered cash receipt logs to receive higher program reimbursements.

IN EARLY OCTOBER 2018 KMH performed 15 unannounced visits at 10 different redemption center locations throughout the State to verify that redemption centers were in compliance with the law. KMH redeemed either aluminum, plastic, or glass containers and received a 10-key tape receipt for the money paid for the redemption. The KMH staff auditor also signed a cash receipt log, attesting to the amount of recyclable material submitted to the center and the money paid out in return.

KMH waited about a month for the redemption centers to submit their Deposit Refund Request Form (DR-1) to the program for reimbursement. KMH then had program management request the detailed support for the respective DR-1 from the redemption centers.

KMH found that in 2 out of 15 redemption center visits, the amounts provided in the cash receipt log did not match the amount KMH was paid. Both of the discrepancies were at the Reynolds Recycling location at 1106 University Avenue.

On October 2, 2018, KMH’s staff auditor redeemed glass bottles, which the redemption center determined weighed 5.1 pounds. The staff auditor was paid $0.61. However, after the visit, 32.8 pounds of aluminum cans and 12.8 pounds of plastic containers were added to the cash receipt log, adding $52.48 and $16.83 respectively to the total. As a result, instead of $0.61, the redemption center requested and was reimbursed $69.31 by the State. Two days later, on October 4, 2018, the staff auditor redeemed plastic containers, which the redemption center determined weighed three pounds. The staff auditor was paid $3.95, but 6.9 pounds of aluminum cans were added to the cash receipt log, which added $11.04 to the total. The redemption center was reimbursed $14.99 instead of $3.95.

With 13 redemption centers on O‘ahu and 2 on Kaua‘i, Reynolds Recycling is the largest operator of certified redemption centers in the State. In FY2018, the State paid Reynolds Recycling approximately $7.96 million in reimbursements and fees.

A Leaky, Open-ended System

The Hawai‘i Regulatory Licensing Reform Act requires the Auditor
The Deposit Beverage Container Program relies on self-reported, unverified claims of the number of containers sold and redeemed.

DEPOSIT AND FEE COLLECTIONS from distributors, as well as payments to certified redemption centers, are based on self-reported and unverified numbers. These fundamental weaknesses to the program’s deposit and redemption process are exacerbated by limited inspections and other procedures, which would prevent or detect whether distributors are fraudulently or erroneously under-reporting beverage containers distributed, and whether redemption centers are fraudulently or erroneously over-reporting those redeemed. In three out of four of our latest audits, we found such discrepancies. The Department of Health has been aware of this flawed payment system since 2006, but has done little to address it either with changes to the program or through enforcement inspections.

 

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Report No. 19-08, Financial and Program Audit of the Department of Health’s Deposit Beverage Container Program, June 30, 2018Summary
02/01/2019

 

Relatively low demand for air ambulance services to the continental United States, but costs for each case are high; in addition, the specific definition set forth in the proposed coverage could lead to unintended effects.

PHOTO: Airmed

AUDITOR’S SUMMARY

IN THE 2018 LEGISLATIVE SESSION, the Hawai‘i State Legislature contemplated mandating insurance coverage for medically necessary transportation from the State to the continental United States. In Report No. 19-07, Study of Proposed Mandatory Health Insurance Coverage for Medically Necessary Transportation from the State to the Continental United States for “Qualifying Patients,” we surveyed Hawai‘i’s health-plan providers and found that demand for air ambulance transportation from the State to the continental United States is relatively low. The two largest health insurance providers in the State reported a total of 28 members that were recommended for medical transportation to the continental United States in 2016 and 2017. However, when air ambulance service from Hawai‘i to the continental United States is not covered by a patient’s insurance, the financial burden on the patient and their family can be devastating. Given the huge cost for an air ambulance to continental United States – estimates range from $42,000 to $112,000 for a single trip – few patients can afford to pay without assistance.

Social and Financial Impacts of House Bill No. 687
State law requires an impact assessment by the Auditor before any legislative measure mandating health insurance coverage for a specific health service, disease, or provider can be considered. The proposed coverage under House Bill No. 687 (HB 687) provided a specific definition of “qualifying patient” eligible for such coverage, which included detailed criteria to be fulfilled. In addition, House Concurrent Resolution No. 52 included an additional criterion to the definition of “qualifying patient” for our assessment.

Hawai‘i’s geographic isolation and relatively small population make it difficult for Hawai‘i physicians and medical teams to sufficiently maintain their skills and physical resources to treat certain uncommon conditions or perform uncommon procedures. Consequently, Hawai‘i currently lacks many sub-specialty medical services requiring expertise that is obtained in high volume medical centers, and patients requiring such procedures must sometimes seek treatment at facilities in the continental United States. As noted, we found that the number of patients that seek coverage for air ambulance services to the continental United States is small. Notwithstanding, we acknowledge that when air ambulance service from Hawai‘i to the continental United States is not covered by a patient’s insurance, the financial burden on the patient and their family can be devastating.

We found that in most cases, insurers have been providing coverage for air ambulance transportation to the continental United States. There were a number of reported cases in which such transportation was requested but not covered. However, we were not provided details as to whether those particular cases involved “qualifying patients” as defined in HB 687. Insurers reported that they have been providing coverage for such services when deemed “medically necessary.” However, the determination of medical necessity is left to the health insurance provider on a case-by-case basis.

We also found that, if HB 687 were passed based on its current definition of “qualifying patient,” survey respondents anticipated that the number of conditions for which mandated health insurance would cover medical transportation to the continental United States for treatment would be reduced because of the criteria imposed. Therefore, based on the insurers’ and medical facilities’ responses, it appears that the proposed legislation, which sets forth specific definitions for a “qualifying patient” under the mandatory coverage may lead to fewer patients being approved for coverage, which would be contrary to the intent of the bill.

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Report No. 19-07, Study of Proposed Mandatory Health Insurance Coverage for Medically Necessary Transportation from the State to the Continental United States for “Qualifying Patients”Summary
01/25/2019

Photo: Office of the Auditor

AUDITOR’S SUMMARY

24 funds and accounts did not meet criteria

WE REVIEWED 377 FUNDS AND ACCOUNTS administered by the Department of Transportation (DOT) and reported on 46 of them – specifically, 14 special funds, 21 revolving funds, 5 trust funds, and 6 trust accounts. We found 5 special funds, 17 revolving funds, 1 trust fund, and 1 trust account did not meet criteria – specifically, 16 revolving funds should be reclassified as trust accounts and 1 trust account should be reclassified as a trust fund; 2 special funds should be evaluated to determine whether they should be closed; and 3 special funds, 1 revolving fund, and 1 trust fund should be closed.

Section 23-12, Hawai‘i Revised Statutes (HRS), requires the Auditor to review each department’s special, revolving, and trust funds every five years. Although not mandated by statute, we included trust accounts as part of our review. This is our sixth review of DOT’s revolving funds, trust funds, and trust accounts, and our second review of DOT’s special funds.

We used criteria developed by the Legislature and by our office based on public finance and accounting literature. For each fund, we present a five-year financial summary, the purpose of the fund, and conclusions about its use. We did not audit the financial data which is provided for informational purposes. We do not present conclusions about the effectiveness of programs or their management, or whether the programs should be continued.

Inactive accounts result in unused moneys of approximately $120 million
WE NOTED CERTAIN SUB-ACCOUNTS of 3 special funds, 3 revolving funds, and 1 trust fund with remaining balances totaling approximately
$120 million as of June 30, 2018, had no financial activity during our
5-year review period. DOT represents that certain revolving funds, which we determined should be reclassified as trust accounts, are required by bond certificate provisions to hold debt service payments relating to revenue bonds.

Reporting shortfall
WE ALSO NOTED that DOT did not report its administratively created funds to the Legislature, as required by statute. Because these funds are created outside of the legislative process, the Legislature may have limited, if any, understanding as to the existence of the funds or the moneys held in the funds. Accurate and complete reporting will greatly improve the Legislature’s oversight and control of these funds and provide increased budgetary flexibility.

DOT created funds inappropriately
SPECIAL FUNDS AND REVOLVING FUNDS can only be established pursuant to an act of the Legislature. DOT created 2 funds – specifically, 1 special fund and 1 revolving fund –administratively, outside of the legislative process. Because those funds were inappropriately created, we recommended that they be closed.

Agency response

Airports Division
Airports Division agreed with our findings and recommendations. Airports Division said that it intends to reclassify the revolving funds we identified as not meeting the statutory criteria for a revolving fund to trust accounts; review the sub-accounts to the Airport Revenue Fund for Construction and Design that had no activity during our review period and close sub-accounts that are no longer needed; and include the Airport Sinking Fund for Retirement Term Bond in its Non-General Funds reports to the Legislature, as required by statute.

Harbors Division
Harbors Division acknowledged our findings and recommendations regarding its revolving funds we identified as not meeting the statutory criteria for a revolving fund. Harbors Division intends to implement the recommendations to reclassify those revolving funds to trust accounts and reported that the balance of the Aloha Tower Fund was transferred and the fund subsequently closed.

Harbors Division suggested some minor technical edits to the report, which we have incorporated. We note that these edits are for clarification purposes only and do not impact our analysis of Harbors Division’s funds.

In its response, Harbors Division did not address our finding regarding the Risk Management Fire and Casualty Losses – Harbors trust fund, which we found should be closed. Moreover, Harbors Division did not address our observations regarding inactive accounts and non-compliance with statutory requirements for reporting. We must emphasize that they should close the inactive sub-accounts and comply with statutory reporting requirements.

Highways Division
Highways Division agreed with our findings and recommendations regarding its revolving funds we identified as not meeting the statutory criteria for a revolving fund and states that it will evaluate reclassifying them as trust accounts.

Highways Division acknowledged that the Safe Routes to School Program Special Fund and the Motorcycle and Motor School Operations Education Fund can be funded through the general fund appropriation process. Highways Division said that the revenue for these funds are transferred from other State agencies’ special funds and, therefore, questions whether the general fund appropriation process is applicable. This additional information did not impact our final analyses as the current source of revenue is immaterial if this program were to be funded through the general fund appropriation process as Highways Division concedes is possible. We also note that Highways Division did not provide this information to us in their response to questionnaires about its funds, during multiple discussions about its funds, or at the exit conference. In the report (at pages 5-6), we document the difficulties that we encountered in obtaining information from Highways Division, including the less-than-complete responses and information we were provided about its funds. For us to thoroughly assess a department’s funds, it is important that we receive complete and timely information.

Highways Division disagreed with our conclusion that the Safe Routes to School Program Special Fund does not meet the criteria of a special fund due to partial nexus between the program and source of revenue. We recognize the Legislature’s desire to secure a source of funding to make the Safe Routes to School Program permanent, however, as we explained in the report, we did not find convincing evidence of sufficient nexus between the program and one of the sources of revenue, which is one of the statutory criteria required of a special fund.

Highways Division did not object to our determination that the Special Deposits – Highways trust account should be reclassified to a trust fund and that the Highway Senior Debt Service Reserve Account and Transportation Improvement Special Fund should be closed because these funds no longer serve their original purpose. We assume that the Highways Division intends to follow our recommendations with respect to that account and those funds. Finally, although Highways Division did not address our observations regarding inactive accounts and non-compliance with statutory requirements for reporting, we must emphasize that they should close the inactive sub-accounts and comply with reporting requirements.
.

FUND TYPES

SPECIAL FUNDS
are used to account for revenues earmarked for particular purposes and from which expenditures are made for those purposes.

REVOLVING FUNDS
such as loan funds, are often established with an appropriation of seed money from the general fund, and must demonstrate the capacity to be self-sustaining.

TRUST FUNDS
such as a pension fund, invoke the State’s fiduciary responsibility to care for and use the assets held to benefit those with a vested interest in the assets.

TRUST ACCOUNTS
are typically separate holding or clearing accounts and are often used as accounting devices for crediting or charging state agencies or projects for payroll and other costs.

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Report No. 19-05, Review of Special Funds, Revolving Funds, Trust Funds, and Trust Accounts of the Department of TransportationSummary
01/15/2019
HART pays HDR over $505,000 per HDR staff per year or over $42,000 per HDR staff per month. Yet HART does not evaluate the performance of the embedded HDR employees.

PHOTO: HONOLULU AUTHORITY FOR RAPID TRANSPORTATION

AUDITOR’S SUMMARY

IN REPORT NO. 19-04, Audit of the Honolulu Authority for Rapid Transportation: Report 2, we examined the Honolulu Authority for Rapid Transportation’s (HART) current management structure, the relationship between HART and its Board of Directors (Board), and HART’s use of third-party consultants to manage the Honolulu Rail Transit Project (Project), focusing on fiscal years 2017 and 2018.

What Did We Find?
We found that, despite recently adopted board rules addressing the division of duties between HART and its Board, there are still gray areas. This provides the Chief Executive Officer (CEO) considerable discretion in what to report to and when to consult with the Board, including information that could critically affect or alter the way HART operates. For instance, HART withholds the amount it has allocated in each contract to cover unexpected costs when reporting to the Board the budget for a particular scope of work, based on the CEO’s belief that disclosing the amount set aside in reserve could lead to higher project costs. In another instance, HART management believed the decision to pursue a public-private partnership, or “P3,” to complete the $1.4 billion City Center Guideway and Stations segment was a matter of “project delivery,” not subject to board approval.

We also found that HART relies on a third-party consultant, HDR Engineering, Inc. (HDR), to staff many of HART’s senior management positions and other positions directly responsible for and critical to the design and construction of the Project, including Project Director; Senior Project Officer of Core Systems, Integration, and P3; Director of Design and Construction; and Risk Manager; among other director, manager and deputy director positions. While HART claims that HDR employees are completely integrated into its organizational structure, with no distinction between HDR and HART employees, the embedded HDR employees are paid and evaluated by their private employer, not HART, with many HDR employees directly overseeing the work of other HDR employees as well as other third-party consultants. And, we found that HART does not evaluate the performance of the embedded HDR employees and approves HDR monthly invoices that average about $800,000, or over $42,000 per HDR employee, with little substantive review.

Why Did These Problems Occur?
Until passage of a 2016 charter amendment expanded its authority, the Board believed its oversight of administrative affairs was limited to hiring, evaluating, and terminating the CEO. While recent Board actions have sought to clarify the lines of authority, certain aspects of management and governance fall into gray areas. Consequently, the CEO has considerable discretion over what is reported to the Board, leaving the Board hard-pressed to assess HART’s budgeting process or hold the CEO accountable for staying within budget.

Further, HART’s oversight over its embedded third-party consultant shows a lack of consistent follow-through and monitoring of HDR or embedded HDR employees’ performances. According to the CEO, HART hires third-party consultants because it is unable to find highly qualified candidates willing to accept a City and County of Honolulu (City) salary for the positions. In addition, since HART will only operate until the Project is completed, the CEO does not want HART to have to terminate civil service employees at the end of the Project.

Why Do These Problems Matter?
The Honolulu Rail Transit Project is the largest public works project
in the State, and has been funded largely by a one-half percent City surcharge on the State general excise tax (GET). Under the 2012 Full Funding Grant Agreement with the Federal Transit Administration (FTA), increases in the Project’s costs are borne by the State and City, so rising costs have led to extensions of the GET surcharge to the end of 2030. In addition, as of January 1, 2018, the transient accommodations tax was increased by one percentage point to 10.25 percent, also through 2030, and also to help fund rail. As the price of the Project has risen, the burden on Hawai‘i residents and visitors whose tax payments must fund all overages has nearly doubled from $3.589 billion in 2012 to $7.684 billion in 2018.

Without clear lines as to the specific types of information requiring Board consideration, the CEO is given broad discretion as to what decisions are his to make. The CEO’s decision to withhold contract-specific allocated contingency from the Board deprives the Board of being able to assess the total amounts HART has budgeted for specific work and to ensure that the Project is on-budget; without that information, the CEO is not fully accountable to the Board. Similarly, we believe that the transition to an entirely different business model, P3, represents a fundamental shift in the completion and eventual operation and maintenance of the Project, and should be reported to and fully vetted by the Board, not left to the CEO. Although the CEO did decide to seek board approval, which was granted in September 2018, we do not believe that decisions of this magnitude should be subject to the CEO’s discretion.

Moreover, with these mounting costs as a backdrop, HART continues to use HDR to staff its key management positions at a cost of $9.6 million per year, or $800,000 per month. Based on an average of 19 HDR-provided employees, HART pays HDR over $505,000 per HDR staff per year or over $42,000 per HDR staff per month. Yet HART does not evaluate the performance of the embedded HDR employees; HART does not even evaluate HDR, generally. But, HART’s ability to complete the Project within the current budget and by the current opening date is dependent on HDR’s employees.

As the FTA has pointed out, filling key management positions with third-party consultants instead of HART employees is less than optimal, leading to less “ownership” and accountability. While we recognize the CEO’s concerns about the eventual shuttering of HART’s operations, there is still a long way to go until the end of the line.

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Report No. 19-04, Audit of the Honolulu Authority for Rapid Transportation: Report 2Summary
01/15/2019
As the Honolulu Rail Transit Project progressed, costs swelled from $5.122 billion in 2012 to $9.188 billion in 2018.

PHOTO: HONOLULU AUTHORITY FOR RAPID TRANSPORTATION

AUDITOR’S SUMMARY

IN 2012, THE CITY AND COUNTY OF HONOLULU (City) broke ground on a 20.1 mile elevated rail transit system extending from Kapolei to Ala Moana. We found that, as the Honolulu Rail Transit Project (Project) progressed and costs swelled from $5.122 billion in 2012 to $9.188 billion in 2018, Honolulu Authority for Rapid Transportation (HART) began reporting information to the public that often contradicted its own internal projections or differed from what it was telling the Federal Transit Administration (FTA). Since federal funding for the Project is fixed at $1.55 billion, the financial burden on State residents, as well as visitors, has escalated along with the estimated costs to complete Honolulu’s rail transit system.

What Did We Find?
In Report No. 19-03, Audit of the Honolulu Authority for Rapid Transportation: Report 1, we examined records relating to the Project, including internal documents of the HART materials provided to the HART Board of Directors, and reports published by the FTA project management oversight consultant. We found that HART’s inaccurate reporting of its estimated costs to complete the Project and the estimated date by which it expected to begin full operations undermined the Board’s oversight, obscured the extent of the Project’s financial problems, and eroded public confidence. The Full Funding Grant Agreement with the FTA, which commits the City to completing the project on time, within budget, and in compliance with certain federal requirements, was based on a cost of $5.122 billion. That estimated cost to complete the Project has been revised upward repeatedly since 2012 because of change orders, scheduling delays, inflation, a lengthy environmental review, lawsuits, utility line relocation, and other unanticipated expenses. Our review of project cost estimates from 2014 to 2016 found that internal alarms of rising project costs and scheduling delays were not shared in a timely manner by HART management with the Board, the Legislature, or the public.

Why Did These Problems Occur?
The City prematurely entered into contracts under an artificial timeline and fragile financial plan, stemming from a desire to demonstrate that the Project was progressing satisfactorily and to minimize public criticism. For instance, when the City awarded its first construction contract in 2009, the environmental review process was still underway and the FTA had not yet approved entry into the final design phase of the federal grant process or authorized pre-grant award construction activities. The City awarded the $483 million contract anyway, citing concerns over rising costs and loss of tax revenue. Over the next two years, prior to receiving FTA approval to begin construction in 2012, the City would award more contracts totaling nearly $2 billion. Overall, these prematurely awarded contracts resulted in $354.4 million in change orders, as of August 2017, with major change orders still unresolved due to the opening date being pushed back to 2025.

Additionally, as early as April 2014, HART began reporting different project contingency amounts to different audiences, which may have distorted the Project’s financial outlook and delayed triggering of a recovery plan. Among other things, we found that throughout 2015, while HART was grappling with major unanticipated cost increases, HART’s monthly progress reports to the Board failed to include updated project cost estimates and opening date projections that were otherwise reported in FTA oversight contractor meetings and documented in
FTA monthly reports. We also found that between 2014 and 2016, the Project’s contingency reserves fell significantly below FTA-recommended levels; by 2016, total contingency had fallen $1.189 billion below the FTA’s recommendation.

Why Do These Problems Matter?
Since 2009, when the first rail contract was awarded under an artificial timetable and financial plan, City officials have neglected their responsibility to spend money prudently. We found that as early as 2014, HART’s methodology for reporting of contingency became opaque and inconsistent, obscuring the need for a recovery plan until June 2016. Moreover, the cost overruns and delays that have sent the City’s share of the final price tag soaring also have eroded public confidence in a project that relies largely on local funding. A one-half percent general excise tax surcharge on purchases and business transactions in Honolulu represents a major source of rail funding, and has been extended twice to December 31, 2030. Additionally, on January 1, 2018, the statewide transient accommodations tax was increased 1 percentage point to 10.25 percent to help cover the Project’s capital costs, including construction and land acquisition. As the estimated cost at completion has since increased to $9.188 billion, and federal funding is fixed, the burden on State taxpayers, as well as visitors, has risen to $7.684 billion as of November 2018.

By Fall 2018, the Project was about 46 percent completed, with roughly 10 miles of elevated guideway and a maintenance and storage facility built in West O’ahu. In September 2018, HART’s board approved the solicitation of a public-private partnership, or “P3,” to help pay the now $1.4 billion cost of the city center section of the rail project and build a Pearl Highlands Parking Garage and Transit Center. In its 2018 revised recovery plan, released on November 19, 2018, HART wrote: “Consistent with FTA direction, the Project will be completed at a cost of under $8.299 billion1 excluding financing costs with a Revenue Service Date (RSD) for the full system no later than September 2026.”

But then HART went on to make its own optimistic projection:

“HART’s commitment to the residents of Honolulu is to complete the Project at a cost no greater than $8.165 billion2 and open for full revenue service by December 2025.”

1 The FTA’s recommended cost estimate is $9.188 including financing costs, as of November 2018.
2 HART’s total project cost estimate is $9.020 including financing costs, as of November 2018.
Clarification: The Auditor’s Summary has been revised to clarify that HART’s board approved pursuing a public-private partnership (P3) to finance and construct the city center section of the Project and the Pearl Highlands Parking Garage and Transit Center, removing a clause that implied the City lacked the funds to complete those projects.

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Report No. 19-03, Audit of the Honolulu Authority for Rapid Transportation: Report 1Summary
01/04/2019
In FY2017, the Land Conservation Fund’s cash balance was $27.8 million, of which approximately $16.6 million sits idle, not reserved for grant awards or program expenses.

PHOTO: DEPARTMENT OF LAND AND NATURAL RESOURCES

AUDITOR’S SUMMARY

IN 1973, THE LEGISLATURE laid the foundation for a land conservation program and fund, formalizing the importance of protecting and preserving the natural beauty and historic significance of Hawai‘i’s lands through State-funded acquisition and management. In 2005, the Legislature provided the land conservation program with a dedicated funding source – ten percent of conveyance tax collected – and repurposed an existing fund, renaming it the Land Conservation Fund, for the express purpose of acquiring land having resource value to the State. The Land Conservation Fund and the associated Legacy Land Conservation Program are administered by the Department of Land and Natural Resources (DLNR), which delegated that responsibility to its Division of Forestry and Wildlife (DOFAW).

What We Found
In our audit, we found that DLNR and DOFAW have struggled to properly manage the Legacy Land Conservation Program, hampering its effectiveness. For example, we found that the program missed fiscal deadlines to create and execute contracts for conservation grant awards, which caused funding for those grants to lapse and triggered a “domino effect” of improperly committing anticipated future appropriations to fund previous awards; the department mistakenly paid a total of nearly $685,000 for State central service fees – a cost the Land Conservation Fund had been statutorily exempt from since 2015; and DLNR has used the Land Conservation Fund to pay the salary of an employee who is doing work unrelated to the Legacy Land Conservation Program. In addition, the program has not tracked or reported to the Legislature the balances of Land Conservation Fund moneys transferred to a DLNR trust account.

We also found that DOFAW sought and/or obtained funding from the Land Conservation Fund for its own projects outside of the Legacy Land Conservation Program’s grant award process, which is an almost year-long, public process that includes funding recommendations by the Legacy Land Conservation Commission. In those cases, DOFAW acted as an applicant advocating its own projects for funding through the Legacy Land Conservation Program grant award process; after the Commission prioritized other applicants’ projects in front of its projects, DOFAW acted as advisor to the Board of Land and Natural Resources (Land Board) on the use of the same limited moneys to fund its projects. The practice of reprioritizing, and in some cases substituting its judgment for that of the nine Governor appointed and Senate-confirmed commissioners, each of whom possesses certain statutorily-required professional and cultural expertise, is far less
transparent and accountable than the program’s grant award process.  DOFAW’s unique role and special relationship with the Land Board confer an advantage relative to other grant applicants, especially given the limited pool of resources available from the Land Conservation Fund.

Why Did These Problems Occur?
We found that the department did not have a transition plan to help ensure the seamless operations of the Legacy Land Conservation Program when the former Program Manager resigned, which even the department acknowledges is the cause of many of the program’s management issues that we report. Moreover, the department appears to misunderstand its ability to commit future funds – i.e., moneys that it does not have. The department simply cannot commit moneys until those funds are appropriated to the program through the Legislature’s budget process. We also found that the department has not developed a Resource Land Acquisition Plan, which the Legislature directed DLNR to prepare and periodically update when it created the Legacy Land Conservation Commission and the program’s dedicated funding source. Without a long-range plan, the program and DLNR’s land conservation actions lack a clear, consistent, and transparent direction and purpose; without a plan, DLNR’s management of the program and its use of the Land Conservation Fund is arbitrary, opaque, and may be inconsistent with the State’s long-term land conservation goals. The need for a plan is magnified by the relatively fluid composition of the Land Board and the importance of the State’s mission of stewardship over public lands.

Why Do These Problems Matter?
Hawai‘i has long recognized the concept of government ownership and management of land as a conservation tool. The purpose underlying Hawai‘i’s land conservation efforts is set forth in Section 173A-1, HRS:

[T]hese lands, though protected by the land use law, may in many instances require placement under public ownership and management in order that they can be made accessible to all people of the State. The purpose of this chapter is to provide for the acquisition and management of such lands in those instances in which such acquisition and management are considered necessary by the State.

Without a clear roadmap in place, there is an increased risk that decisions regarding land acquisitions will be arbitrary and inconsistent, and subject to change with each new board, commission,
and department head. Although some flexibility and adaptability are necessary, the determination of what is the State’s “best interest” in this regard should not be so reliant on subjective  understanding and personal biases.

After a little more than a decade in existence, the Legacy Land Conservation Program has awarded 58 projects with $47.3 million in grant moneys. Only about half of these projects have reached
completion – i.e., land purchased and conserved. Almost a third of the awards are still pending. Since the acquisition of conservation land can be a complicated process, and considering the relative infancy of the program, it is difficult to determine if the program is achieving its statutory purpose.

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Report No. 19-01, Audit of the Department of Land and Natural Resources’ Land Conservation FundSummary
12/20/2018

Photo: Office of the Auditor

AUDITOR’S SUMMARY

Two special funds, two trust funds, and four trust accounts did not meet criteria

WE REVIEWED 92 FUNDS AND ACCOUNTS administered by the Department of Accounting and General Services (DAGS) and reported on 33 of them – specifically, 7 special funds, 6 revolving funds, 7 trust funds, and 13 trust accounts. We found 2 special funds, 2 trust funds, and 4 trust accounts did not meet criteria – specifically, 2 special funds, 2 trust funds, and 3 trust accounts should be closed, and 1 trust account should be reclassified to a trust fund.

Section 23-12, Hawai‘i Revised Statutes (HRS), requires the Auditor to review all existing special, revolving, and trust funds every five years.  Reviews are scheduled so that each department’s funds are reviewed once every five years. Although not mandated by statute, we included trust accounts as part of our review. This is our sixth review of the revolving funds, trust funds, and trust accounts, and our second review of the special funds of DAGS.

We used criteria developed by the Legislature and by our office based on public finance and accounting literature. For each fund, we present a five-year financial summary, the purpose of the fund, and conclusions about its use. We did not audit the financial data which is provided for informational purposes. We do not present conclusions about the effectiveness of programs or their management, or whether the programs should be continued.

Reporting shortfall
We also noted that DAGS did not file statutorily required reports for administratively created funds. Accurate and complete reporting will greatly improve the Legislature’s oversight and control of these funds and provide increased budgetary flexibility.

Agency response
DAGS agreed with our findings and will take appropriate action to close the identified funds and accounts that did not meet criteria and reclassify the one trust account to a trust fund. DAGS will also comply with reporting requirements.

In reference to the Shared Services Technology Special Fund, DAGS disagreed with our conclusion that the fund did not meet the criteria of a special fund and said that it will “defer” to the Legislature regarding whether the fund meets the criteria. The Legislature charged the Office of the Auditor with reviewing the funds maintained by State departments, including DAGS.  That review includes assessing whether the funds should be continued based on criteria established by the Legislature. For a special fund, one of the criteria is that the fund “[s]erves a need as  demonstrated by . . . [a]n explanation as why the program cannot be implemented successfully under the general fund appropriation process,” Section 37-52.3, HRS. As we reported, DAGS represented to us that the program which the special fund supports can be implemented under the general fund appropriation process. On that basis, we concluded that the fund did not meet the criteria of a special fund. Furthermore, in our prior fund review, Report No. 14-01 (March 2014), DAGS expressed its intention to move the positions funded by this special fund to general-funded positions.

FUND TYPES

SPECIAL FUNDS
are used to account for revenues earmarked for particular purposes and from which expenditures are made for those purposes.

REVOLVING FUNDS
such as loan funds, are often established with an appropriation of seed money from the general fund, and must demonstrate the capacity to be self-sustaining.

TRUST FUNDS
such as a pension fund, invoke the State’s fiduciary responsibility to care for and use the assets held to benefit those with a vested interest in the assets.

TRUST ACCOUNTS
are typically separate holding or clearing accounts and are often used as accounting devices for crediting or charging state agencies or projects for payroll and other costs.

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Report No. 18-21, Review of Special Funds, Revolving Funds, Trust Funds, and Trust Accounts of the Department of Accounting and General ServicesSummary
12/13/2018
Medical complications can develop from portwine stains. Over time, port-wine stains can progress and “hypertrophy” – or thicken – and “nodules,” or lumps due to abnormal swelling, may also develop with age.

PHOTO: © 2015 Brightman et al. Published by Dove Medical Press Limited, and licensed under Creative Commons Attribution – Non Commercial (unported, v3.0) License

AUDITOR’S SUMMARY

Assessment challenging due to lack of data, breadth of proposed coverage

IN THE 2018 LEGISLATIVE SESSION, the Hawai‘i State Legislature contemplated mandating insurance coverage for treatment of port-wine stains, irrespective as to whether the treatment is deemed to be medically necessary. In Report No. 18-20, Study of Proposed Mandatory Health Insurance for Port-Wine Stains, we surveyed Hawai‘i’s health-plan providers and found that insurance coverage is currently provided for “medically necessary” treatment. However, there are differing positions between health insurers and health care providers as to when treatments for port-wine stains are for cosmetic purposes and when treatments are considered medically necessary. The majority of health care insurers surveyed said that medical treatments are deemed necessary when a patient experiences some functionality issues resulting from a port-wine stain.  However, some health care providers argue that port-wine stains may negatively impact a patient’s quality of life and have psychological impacts even where there are no functionality issues.

Social and Financial Impacts of House Bill No. 1705, H.D. 1

State law requires an impact assessment by the Auditor before any legislative measure mandating health insurance coverage for a specific health service, disease, or provider can be considered. In our examination of the potential social and financial effects of mandating health insurance coverage for portwine stains, the majority of insurers either could not provide the total number of members who received medical treatment for port-wine stains over a three-year period, or said that they did not receive any claims for such treatments. Based on data reported in published studies, we estimated that the number of people in Hawai‘i that have port-wine stains ranged from nearly 600 to roughly 7,100 people.

The scope of coverage under House Bill No. 1705, H.D. 1, also presented some challenges to our assessment. The proposed mandate does not consider medical necessity and would, therefore, apply to all port-wine cases. The majority of insurers surveyed replied that mandated coverage would cause insurance premiums to increase, but did not provide an estimate.
As raised in this report, there will be several issues to address when considering whether to implement House Bill No. 1705, H.D. 1.

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Report No. 18-20, Study of Proposed Mandatory Health Insurance for Port-Wine StainsSummary
12/13/2018

Photo: Department of Land and Natural Resources

AUDITOR’S SUMMARY

17 funds and accounts did not meet criteria

WE REVIEWED 107 FUNDS AND ACCOUNTS administered by the Department of Land and Natural Resources (DLNR) and reported on 37 of them – specifically, 18 special funds, 1 revolving fund, 9 trust funds, and 9 trust accounts. We found 9 special funds, 4 trust funds, and 4 trust accounts did not meet criteria – specifically, 8 special funds and 1 trust fund should be evaluated to determine if they should be continued; 1 special fund, 2 trust funds, and 2 trust accounts should be closed; 2 trust accounts should be reclassified to trust funds; and 1 trust fund should be reclassified to a trust account.

Section 23-12, Hawai‘i Revised Statutes (HRS), requires the Auditor to review all existing special, revolving, and trust funds every five years.  Reviews are scheduled so that each department’s funds are reviewed once every five years. Although not mandated by statute, we included trust accounts as part of our review. This is our sixth review of DLNR’s revolving funds, trust funds, and trust accounts, and our second review of DLNR’s special funds.

We used criteria developed by the Legislature and by our office based on public finance and accounting literature. For each fund, we present a five year financial summary, the purpose of the fund, and conclusions about its use. We did not audit the financial data which is provided for informational purposes. We do not present conclusions about the effectiveness of programs or their management, or whether the programs should be continued.

Inactive funds result in unused moneys of nearly $1.9 million
Three special funds and their related sub-accounts with remaining balances of nearly $1.9 million as of June 30, 2018, had no financial activity during the 5-year period of our review. Leaving significant amounts of money in idle accounts is an inefficient use of public funds.

Reporting shortfall
We noted that DLNR did not file statutorily required reports for non-general funds and for administratively created funds. Accurate and complete reporting will greatly improve the Legislature’s oversight and control of these funds and provide increased budgetary flexibility.

Over $26 million of State’s portion of ceded land revenues were not transferred to the State general fund in a timely manner
DLNR’s trust account which holds the State’s portion of ceded land revenues accumulated approximately $30 million of ceded land proceeds through June 30, 2017. In FY2018, in accordance with Act 178, SLH 2006, DLNR transferred the FY2016 fund balance, over $26 million, to the State general fund after receiving direction from the Department of Budget and Finance (B&F). There were no transfers made to the State general fund during FY2014 – FY2017. DLNR should work with B&F to ensure that the general fund portion of ceded land proceeds are transferred to the State general fund at least annually.

Agency response
For 6 funds and 2 accounts, DLNR agreed with our assessment that they did not meet the criteria for those types of funds and accounts. DLNR represented that it will take appropriate action to evaluate whether those funds and accounts should be continued, closed, or reclassified. However, DLNR did not agree with our assessment that 6 funds and 2 accounts did not meet the criteria for those types of funds and accounts. After reviewing DLNR’s reasoning as expressed in its response to the report, we maintain that our analyses are appropriate. We confirm our conclusions that those funds and accounts should be continued, closed, or reclassified.

In reference to the Special Land and Development Fund, we found it did not completely meet criteria of a special fund because there is no clear nexus between the program and the portion of the highway fuel tax that is one of the fund’s sources of revenue. DLNR asserts that there is a nexus between the highway fuel tax and the protection of natural resources. Specifically, according to DLNR, visitors pay the highway fuel tax which funds the department’s natural resource protection programs and, in turn, helps to ensure sufficient access to the State’s natural resources to meet
the needs of those visitors. While we agree that State’s natural beauty is important to the visitor industry, the “nexus” articulated by DLNR between the fuel tax and the visitor industry is too tenuous. There must be a clear link between the revenue source and the program, which we did not find.

As to our other observations, DLNR agreed that any inactive balances will be returned to the originating fund; that they will comply in filing the required statutory reports; and work with the Department of Budget and Finance to ensure the transfer of the State portion of ceded land revenues annually.

FUND TYPES

SPECIAL FUNDS
are used to account for revenues earmarked for particular purposes and from which expenditures are made for those purposes.

REVOLVING FUNDS
such as loan funds, are often established with an appropriation of seed money from the general fund, and must demonstrate the capacity to be self-sustaining.

TRUST FUNDS
such as a pension fund, invoke the State’s fiduciary responsibility to care for and use the assets held to benefit those with a vested interest in the assets.

TRUST ACCOUNTS
are typically separate holding or clearing accounts and are often used as accounting devices for crediting or charging state agencies or projects for payroll and other costs.

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Report No. 18-19, Review of Special Funds, Revolving Funds, Trust Funds, and Trust Accounts of the Department of Land and Natural ResourcesSummary
11/09/2018
In its 2018 report to the Legislature, OHCA stated that all deficiencies identified during an inspection must be corrected before a care home facility is relicensed. However, since OHCA does not conduct follow-up visits to verify implementation of the Plan of Correction, there is no way to determine if corrections have in fact been made. In 2017, 116 care homes in our sample were relicensed before the inspection process was completed.

Photo: Thinkstock.com

AUDITOR’S SUMMARY

IN REPORT NO. 18-18, Audit of the Office of Health Care Assurance’s Adult Residential Care Homes Program, we examined the Office of Health Care Assurance’s (OHCA) relicensing process. That process is integral to OHCA’s ability to ensure that care homes maintain certain quality of care standards to safeguard the health, safety, and welfare of care home residents. Relicensing is a time-consuming effort, which relies heavily on the judgment and discretion of the office’s nurse consultants who inspect adult residential care homes (ARCHs) and expanded adult residential care homes (E-ARCHs) and identify deficiencies in quality of care standards.

What We Found
We found that OHCA renewed licenses without first completing the relicensing process, substituted much less rigorous unannounced care home visits for statutorily required inspections and issued licenses without even inspecting or visiting the facility. About half of the 214 care homes we sampled were allowed to operate in 2017 with either an expired license or a license hastily issued before all required steps of the relicensing process were completed. Of these, OHCA had yet to complete the inspection process from 2016 for 22 care homes. In 2017, eight care homes in our sample had 20 or more deficiencies with certain quality of care standards, but OHCA relicensed them before those deficiencies were resolved. Most of the time, OHCA simply renewed a care home’s license.In addition, we found that OHCA has no written guidelines for enforcement if licensees cannot or will not comply with quality of care standards. For instance, OHCA neither ranks specific care home deficiencies according to severity nor does it have guidance on the number of deficiencies that would disqualify a care home from license renewal. This may at least partially explain why OHCA did not sanction or fine a single care home nor did it completely terminate a single care home license in the 10-year period from 2007 to 2017, even for care homes with substantial or repeat deficiencies.

Why Did These Problems Occur?
We found that OHCA’s primary objective appears to support the continued operations of care homes, not to ensure the health, safety, or welfare of the facilities’ residents as mandated by statute. Perhaps, as a result, we found that OHCA lacks the basic organizational infrastructure necessary to guide and support its relicensing activities. For instance, it has no uniform system to track inspections and review and update information. In addition, OHCA has no internal timelines or deadlines for each step of the relicensing process to ensure tasks are completed within a specific timeframe, and ultimately, before a care home’s one-year license expires.

Why Do These Problems Matter?
“Assurance” is the “A” in OHCA. Assurance assumes that care home residents’ health, safety, and welfare are protected. However, relicensing a care home before the inspection process is completed or doing so without verifying compliance does not provide assurance. And failure to fully define and use enforcement authority do not provide assurance. To the contrary, these circumstances, which we found to exist at OHCA, likely increases the risk to the health, safety, and welfare of care home residents.

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Report No. 18-18, Audit of the Office of Health Care Assurance’s Adult Residential Care Homes ProgramSummary
10/04/2018

Photo: Hawai‘i National Guard

AUDITOR’S SUMMARY

One trust fund did not meet criteria
OUR REVIEW OF SIX TRUST FUNDS and four trust accounts of the Department of Defense (DOD) found one trust fund did not met criteria and should be closed.Section 23-12, Hawai‘i Revised Statutes (HRS), requires the Auditor to review all existing special, revolving, and trust funds every five years. Reviews are scheduled so that each department’s funds are reviewed once every five years. Although not mandated by statute, we included trust accounts as part of our review. This is our second review of DOD’s special
funds, revolving funds, trust funds, and trust accounts.We used criteria developed by the Legislature and by our office based on public finance and accounting literature. For each fund, we present a five year financial summary, the purpose of the fund, and conclusions about its use. We did not audit the financial data which is provided for informational purposes. We do not present conclusions about the effectiveness of programs or their management, or whether the programs should be continued.

Reporting shortfall
WE ALSO NOTED that DOD did not file statutorily required reports for non-general funds and for administratively created funds. Accurate and complete reporting will greatly improve the Legislature’s oversight and control of these funds and provide increased budgetary flexibility.

Agency response
DOD AGREED with our review of its funds and will take appropriate action to close the trust fund that did not meet criteria. DOD will also comply with reporting requirements.

FUND TYPES

SPECIAL FUNDS
are used to account for revenues earmarked for particular purposes and from which expenditures are made for those purposes.

REVOLVING FUNDS
such as loan funds, are often established with an appropriation of seed money from the general fund, and must demonstrate the capacity to be self-sustaining.

TRUST FUNDS
such as a pension fund, invoke the State’s fiduciary responsibility to care for and use the assets held to benefit those with a vested interest in the assets.

TRUST ACCOUNTS
are typically separate holding or clearing accounts and are often used as accounting devices for crediting or charging state agencies or projects for payroll and other costs.

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Report No. 18-11, Review of Special Funds, Revolving Funds, Trust Funds, and Trust Accounts of the Department of Defense, , Summary