COVID-19 SPECIAL PROJECTS

Report on Potential Available

State Moneys Identified in
Prior Audit Reports
A Report to the Legislature
of the State of Hawai‘i

Report No. 20-07

May 2020

OFFICE OF THE AUDITOR

STATE OF HAWAI‘I
 OFFICE OF THE AUDITOR
STATE OF HAWAI‘I

Constitutional Mandate
Pursuant to Article VII, Section 10 of the Hawai‘i State Constitution, the
Office of the Auditor shall conduct post-audits of the transactions, accounts,
programs and performance of all departments, offices and agencies of the
State and its political subdivisions.

The Auditor’s position was established to help eliminate waste and inef-
ficiency in government, provide the Legislature with a check against the
powers of the executive branch, and ensure that public funds are expended
according to legislative intent.

Hawai‘i Revised Statutes, Chapter 23, gives the Auditor broad powers to ex-
amine all books, records, files, papers and documents, and financial affairs
of every agency. The Auditor also has the authority to summon people to
produce records and answer questions under oath.

Our Mission
To improve government through independent and objective analyses.

We provide independent, objective, and meaningful answers to questions

about government performance. Our aim is to hold agencies accountable
for their policy implementation, program management, and expenditure of
public funds.

Our Work

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We conduct performance audits (also called management or operations
audits), which examine the efficiency and effectiveness of government pro-
grams or agencies, as well as financial audits, which attest to the fairness of
financial statements of the State and its agencies.

Additionally, we perform procurement audits, sunrise analyses and sunset

evaluations of proposed regulatory programs, analyses of proposals to man-
date health insurance benefits, analyses of proposed special and revolving
funds, analyses of existing special, revolving and trust funds, and special
studies requested by the Legislature.

We report our findings and make recommendations to the governor and the
Legislature to help them make informed decisions.

For more information on the Office of the Auditor, visit our website:
http://auditor.hawaii.gov
Foreword

In 2020, a novel coronavirus that causes COVID-19 forced the State

of Hawai‘i to take unprecedented measures to protect public health
at a great cost to the Islands’ economy. Efforts to mitigate the impact
of the global pandemic shuttered all but essential local businesses
and slowed tourism to a trickle. Job loss and wage reductions
quickly followed. Tax collections – from general excise taxes,
transient accommodation taxes, and income taxes, among others –
are projected to tilt sharply downward. Under these extraordinary
conditions, the Office of the Auditor is reviewing prior audit reports
and other information to identify potential revenue sources. In this
report, we highlight portions of our prior audit reports about the
Deposit Beverage Container Deposit Fund, Report No. 19-08; the
Special Land and Development Fund, Report No. 19-12; and the
Land Conservation Fund, Report No. 19-01.

Leslie H. Kondo
State Auditor

i
Report on Potential Available State Moneys Identified in Prior Audit Reports

ii COVID-19 Report No. 20-07 / May 2020

 PHOTO: ISTOCK.COM
COVID-19 SPECIAL PROJECTS

Review of Audit Reports of the

Department of Health’s Deposit
Beverage Container Deposit Fund
Annual increases in unclaimed deposit fees swell
the fund’s cash balance to $48.82 million

Introduction

I
n 2020, a novel coronavirus that causes COVID-19 forced the State
of Hawai‘i to take unprecedented measures to protect public health, Since FY2018, the
at great cost to the Islands’ economy. Efforts to mitigate the impact most recent year
of the global pandemic shuttered all but essential local businesses
we audited, the
and slowed tourism to a trickle. Job loss and wage reductions quickly
redemption rate was
followed. Tax collections – from general excise taxes, transient
accommodations taxes, and income taxes, among others – are
below 65 percent.
projected to tilt sharply downward. Under these extraordinary
conditions, the Office of the Auditor is reviewing prior audit reports
and other information to identify potential revenue sources, along with
accounts and subaccounts associated with special and revolving funds
that have excess state moneys. The Legislature transferred moneys in
certain accounts and subaccounts to the General Fund in 2002, during
the economic downturn that followed the September 11, 2001 terrorist
attacks (Act 178, Session Laws of Hawai‘i (SLH) 2002) and again

Report No. 20-07 / May 2020 1

Review of Audit Reports of the Department of Health’s Deposit Beverage Container Deposit Fund

in 2009, 2010, and 2011 to meet budget shortfalls during the Great
Recession (Act 79, SLH 2009, Act 192, SLH 2010, and Act 124
SLH 2011).

The Fund
Department of Health’s Deposit Beverage Container Deposit Fund

The Current Balance

$48.82 million

About the Fund

The fund is used to administer the Deposit Beverage Container
Program, which requires consumers to pay a $0.05 deposit on certain
cans and bottles. When consumers bring the empty containers to
redemption centers, their deposits are returned and redemption centers
are reimbursed through the fund.1 The percentage of empty containers
being redeemed, i.e., the redemption rate, has been steadily declining,
leaving unclaimed deposits to accumulate in the special fund.

A declining redemption rate = a growing fund balance

For much of the Deposit Beverage Container Program’s history, the

redemption rate has been above 70 percent, hitting a high of 79 percent
in FY2009; however, since then, consumers have been redeeming
containers at steadily declining rates. In FY2015, the redemption rate

Exhibit 1
Deposit Container Redemption Rates and Ending Cash
Balances

Redemption Rates Ending Cash Balances

80% $40M
4

$30M

70% $20M

$10M

60% 0
FY FY FY FY FY FY FY FY FY FY FY FY FY FY
06 08 10 12 14 16 18 06 08 10 12 14 16 18

1
Department of Health, Environmental Management Division, Solid and Hazardous
Waste Management Branch

2 Report No. 20-07 / May 2020

Exhibit 2
S-313 Deposit Beverage Container Deposit Special Fund
For the past five years, average revenues have exceeded average expenditures by almost $5.6 million.

2015 2016 2017 2018 2019 2020 YTD

Beginning Cash $15,483,203 $22,289,136 $25,235,235 $29,742,414 $36,788,260 $43,415,257

Revenues $62,696,920 $58,396,621 $57,395,107 $56,956,777 $57,447,386 $46,795,040

Expenditures $55,890,986 $55,450,523 $52,883,626 $49,910,931 $50,820,388 $41,390,613

Cash Transfers $0 $0 $(4,301) $0 $0 $0

Ending Cash $22,289,136 $25,235,235 $29,742,414 $36,788,260 $43,415,257 $48,819,684

fell below 70 percent for the first time since 2007. In FY2018, the most
recent year we audited, the redemption rate was below 65 percent. That
means, for every 100 cans and bottles that a consumer pays the $0.05
deposit, more than 35 of those containers are not being redeemed and
the associated deposits sit dormant in the fund.

During the Great Recession, the Legislature authorized the transfer of

excess moneys from the Deposit Beverage Container Deposit Fund to
the General Fund – up to $1 million in 2010 and up to $300,000 in 2011.
In our Deposit Beverage Container Deposit Fund audit for FY2012,
we noted Act 192, SLH 2010, and Act 124, SLH 2011, transferred a
combined $1.3 million in excess moneys from the Deposit Beverage
Container Deposit Fund to the General Fund during FY2011.

A self-sustaining fund
In our most recent audit,2 we reported the program, at June 30, 2018,
had revenues of $24.6 million and expenditures of $17.5 million,
resulting in a $7.1 million increase in fund balance to $37.7 million.
Based on information from the State of Hawai‘i’s Financial Accounting
and Management System (FAMIS), at the end of FY2019, the fund
had grown another $6.6 million to $43.4 million. We retrieved current
information from FAMIS on April 15, 2020; according to those
unaudited figures, the Deposit Beverage Container Deposit Fund’s
FY2020 year-to-date balance was $48.8 million, an increase in fund
balance of $5.4 million.3

2
Report No. 19-08, Financial and Program Audit of the Department of Health’s Deposit
Beverage Container Deposit Program, [for the fiscal year ended] June 30, 2018
3
FY2019 and FY2020 totals are unaudited.

Report No. 20-07 / May 2020 3

Review of Audit Reports of the Department of Health’s Deposit Beverage Container Deposit Fund

As shown in Exhibit 2, revenues exceeded expenditures by

$2.9 million to $7.1 million each of the past five fiscal years, indicating
the program would have sufficient funding to operate if the excess is
transferred into the General Fund. In FY2018, the Deposit Beverage
Container Program’s operating and administrative costs together totaled
$1.2 million, according to audited financial statements.4

More information about the Deposit Beverage Container Deposit Fund

can be found in our past reports:

FY2018, Report No. 19-08:

http://files.hawaii.gov/auditor/Reports/2019/19-08.pdf

FY2016, Report No. 17-02:

http://files.hawaii.gov/auditor/Reports/2017/17-02.pdf

FY2014, Report No. 15-02:

http://files.hawaii.gov/auditor/Reports/2015/15-02.pdf

FY2012, Report No. 13-08:

http://files.hawaii.gov/auditor/Reports/2013/13-08.pdf

4
Department of Health, State of Hawai‘i, Deposit Beverage Container Special Fund
Statement of Revenues, Expenditures and Change in Fund Balance – Governmental
Fund For the Fiscal Year Ended June 30, 2018.

4 Report No. 20-07 / May 2020

 PHOTO: ISTOCK.COM
COVID-19 SPECIAL PROJECTS

Review of the Department of

Land and Natural Resources’
Special Land Development Fund
DLNR retained 58 percent ($27.2 million) of its
ceded lands revenues for its own programs.

Introduction

I
The Office of the Auditor is reviewing prior audit reports and
other information to identify potential revenue sources, along with In FY2015 through
accounts and subaccounts associated with special and revolving FY2017, DLNR
funds that have excess state moneys. This report highlights relevant retained $27.2 million
material from Report No. 19-12, Audit of the Department of Land (58 percent) of the
and Natural Resources’ (DLNR) Special Land and Development Fund
revenues from ceded
(SLDF), which this office issued in June 2019. As detailed below,
lands controlled by
although DLNR met its statutory obligation to remit 20 percent of its
ceded lands revenues to the Office of Hawaiian Affairs, the department the Board of Land and
transferred only a portion of the remainder to the State’s General Natural Resources for
Fund. For the three fiscal years covered in our audit, DLNR retained its own programs.
more than $27 million in ceded lands revenues in the SLDF.

COVID-19 Report No. 20-07 / May 2020 5

Review of the Department of Land and Natural Resources’ Special Land Development Fund

Ceded Land Revenues Retained by

the Department of Land and Natural
Resources
In our audit of the SLDF, we reported that in FY2015, FY2016, and
FY2017, DLNR received a total of $47.1 million in revenues from
What are Ceded leases and permits for ceded lands under the control of the Board of
Land Revenues Land and Natural Resources.1 During that three-year period, DLNR
For? remitted 20 percent of those ceded lands revenues ($9.4 million) to
UNDER THE ADMISSIONS
the Office of Hawaiian Affairs, as required by statute, but did not
ACT of 1959, revenue from transfer the remaining 80 percent to the General Fund. Instead, DLNR
ceded lands is held by the transferred only $8.71 million (18 percent) of the ceded lands revenues
State as a public trust for the to the General Fund and retained $27.2 million (58 percent) in the SLDF
following specific purposes:
for its own programs.
(1) support of public
education; (2) betterment
of the conditions of Native We questioned whether DLNR was superseding the Legislature’s
Hawaiians; (3) development authority by deciding to retain the revenues from ceded lands for its own
of farm and home ownership; use without specific legislative approval to do so. We suggested that
(4) public improvements;
and (5) provision of lands for
policy decisions about the use of ceded land revenues are the purview of
public use. the Legislature – not an individual state department – and suggested that
the department seek guidance from the Legislature about its authority to
keep and spend the ceded land revenues.

We are reproducing the portion of our Report No. 19-12 that more
thoroughly describes our concern about DLNR’s decision to keep and
use the revenues from ceded lands.

About the Fund

The SLDF was statutorily created in 1962 and is one of 18 special funds
maintained by DLNR. The SLDF receives proceeds from the sale
of public lands; mineral and water rights; rents from leases, licenses,
and permits; fees, fines, and other administrative charges included in
Chapter 171, Hawai‘i Revised Statutes (Management and Disposition
of Public Lands); a portion of the highway fuel tax; moneys for the
commercial use of the public trails and access; and a portion of transient
accommodations tax revenues.

1
Ceded lands are the approximately 1.8 million acres of land that were transferred, or
ceded, to the United States at the time of the annexation of Hawai‘i in 1898. These lands
consisted of crown lands once property of the Hawaiian monarchy, and government
lands of the Kingdom of Hawai‘i. The Admission Act, which granted statehood to
Hawai‘i in 1959, returned the lands to the new State of Hawai‘i and provided that
they be held as a public trust. As of May 5, 2020, DLNR’s ceded lands inventory was
1,283,766.543 acres.

6 COVID-19 Report No. 20-07 / May 2020

The SLDF is the funding source for the entire annual operating budget
of the Land Division, the Office of Conservation and Coastal Lands, and
the Engineering Division’s Dam Safety and Geothermal programs. The
SLDF also funds other positions within DLNR and provides funding
support to the Division of State Parks and various resource protection
programs administered by the Division of Forestry and Wildlife.

Special Land and Development Fund –

Past Five Fiscal Years FY2015-FY2019 and
FY2020 YTD
2015 2016 2017 2018 2019 2020 YTD

Beginning Cash $ 17,983,143 $ 19,855,730 $ 21,075,846 $ 21,724,569 $ 26,736,526 $ 32,720,267

Revenues $ 12,635,228 $ 12,725,009 $ 16,198,931 $ 21,070,354 $ 21,192,678 $ 16,626,154

Expenditures $ 10,635,241 $ 12,141,593 $ 16,115,655 $ 15,006,393 $ 14,017,379 $ 11,970,062

Cash Transfers $ (127,400) $ 636,699 $ 565,447 $ (1,052,004) $ (1,191,558) $ (1,228,386)

Ending Cash $ 19,855,730 $ 21,075,846 $ 21,724,569 $ 26,736,526 $ 32,720,267 $ 36,147,972

COVID-19 Report No. 20-07 / May 2020 7

Review of the Department of Land and Natural Resources’ Special Land Development Fund

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Superseding the Legislature?
Did the Land Board overstep its authority when it designated Land Division
properties on ceded lands as “income-producing assets”?

ACCORDING TO the Hawai‘i Admission Act, which other things, the betterment of conditions of Native
made Hawai‘i a U.S. state in 1959, revenue from Hawaiians.
ceded lands are to be held by the State as a public In a December 1, 2010 submittal to the Land
trust for the following purposes: (1) support of public Board, the Land Division Administrator reported
education; (2) betterment of the conditions of Native that, over the years, after paying its 20 percent to
Hawaiians; (3) development of farm and home own- OHA, the 80 percent portion of ceded land reve-
ership; (4) public improvements; and (5) provision nues was used to “supplement” the general fund.
of lands for public use. In 1979, the Legislature However, in the past several years, according to
enacted Chapter 10, HRS, which created the Office the Land Division Administrator, a portion of these
of Hawaiian Affairs. A year later, the Legislature funds had been used to cover the shortfalls of other
amended Chapter 10, adding section 10-13.5, agencies’ OHA payments. Recently, these agencies
HRS, which requires that 20 percent of all revenues had begun to regularly provide their 20 percent to
from ceded lands be expended by OHA for, among OHA; therefore, he reasoned that the remaining 80

CEDED LANDS are the approximately 1.8 million acres of land that were transferred, or
ceded, to the United States at the time of the annexation of Hawai‘i in 1898. These lands
What are consisted of crown lands once property of the Hawaiian monarchy, and government lands
Ceded of the Kingdom of Hawai‘i. The Admission Act, which granted statehood to Hawai‘i in 1959,
returned the lands to the new State of Hawai‘i and provided that they be held as a public
Lands?
trust. The Act stated that management and disposition of such lands should be used as
called for by the constitution and laws of Hawai‘i.

8 COVID-19 Report No. 20-07 / May 2020

We question the Land Division Administrator’s interpretation of
the statutory provision that created the SLDF, specifically his
belief that the revenues from ceded lands administered by the
Land Division (after OHA’s 20 percent share) are intended to
fund the division and other department programs.

percent could now be “returned” to the SLDF. He We question the Land Division Administrator’s
wrote: “Based on the express language of the SLDF interpretation of the statutory provision that created
as noted above, the remaining 80% of ceded land the SLDF, specifically his belief that the revenues
revenues (after paying OHA its 20% share) is sup- from ceded lands administered by the Land Division
posed to be deposited directly into the SLDF and (after OHA’s 20 percent share) are intended to fund
expended by the Department in accordance with the division and other DLNR programs. It is unclear
HRS 171-19.” that the uses of the SLDF are consistent with the
The Land Division Administrator recommended purposes for which ceded land revenues can be
that the Land Board designate 88 hotel, resort, com- used under the Admissions Act. The ceded lands
mercial, and industrial properties on ceded land as and the revenues therefrom are held by the State
“income-producing assets” and authorize the depos- as a public land trust and can only be used for the
it of the revenues from these properties (minus the five specific purposes listed in Section 5(f) of the
20 percent obligated to OHA) into the SLDF so that Admissions Act.
they may be “expended for departmental purposes We also question whether DLNR is superseding
in accordance with the Legislature’s power to decide the appropriate
HRS 171-19.3.” use of ceded lands revenues. The Admissions Act
Eighty of the properties are located on Hawai‘i returned to the State approximately 1.8 million acres
Island, with four on O‘ahu and two each on Maui of land that had been transferred, or ceded, to the
and Kaua‘i. In 2010, the total annual lease rent for United States at the time of annexation of Hawai‘i
the properties was $3.6 million, of which $2.9 million in 1898 and provided the lands be held in a public
(80 percent) would be deposited into the SLDF. land trust for one or more of five specific purposes
Some of the more recognizable properties on the identified in the Act. By keeping the ceded lands
Land Division Administrator’s proposed list were revenues (after OHA’s 20 percent share) in the
the Hilton Hawaiian Village Pier and Olomana Golf SLDF, DLNR – not the Legislature – is deciding the
Links on O‘ahu and the Hilo Hawaiian Hotel on the appropriate use of those moneys; DLNR – not the
Big Island. Legislature – has assumed the State’s fiduciary
The Land Board approved the proposal on responsibility to decide how to use the ceded lands
December 1, 2010. In February 2011, the Land revenues, including uses such as the support of
Division proposed amending the board action to add public schools that are clearly outside of the purpos-
42 additional properties to the list of income-produc- es of the SLDF.
ing assets. Eight months later, it proposed adding We believe significant policy decisions about
five more properties to the list. The Land Board the use of state funds, including the use of ceded
approved both proposals. land revenues, are the purview of the Legislature –
From FY2015 – FY2017, the department not an individual agency – and suggest that DLNR
deposited approximately $27.2 million (58 percent seek guidance from the Legislature about whether
of total ceded land revenues) into DLNR special the department is authorized to keep and spend
fund accounts for use by those DLNR programs and ceded land revenues without specific Legislative
transferred approximately $8.7 million (18 percent) approval to do so.
to the general fund.

COVID-19 Report No. 20-07 / May 2020 9

Review of the Department of Land and Natural Resources’ Special Land Development Fund

10 COVID-19 Report No. 20-07 / May 2020

 PHOTO: DEPARTMENT OF LAND AND NATURAL RESOURCES
COVID-19 SPECIAL PROJECTS

Review of the Department of

Land and Natural Resources’
Land Conservation Fund
In FY2017, the Land Conservation Fund’s cash
balance was $27.8 million, of which $16.6 million sat
idle, not earmarked for projects or program expenses.

Introduction

T
The Office of the Auditor is reviewing prior audit reports and
other information to identify potential revenue sources, along with
accounts and subaccounts associated with special and revolving Since FY2006,
funds that have excess state moneys. This review highlights the program has
relevant material from Report No. 19-01, Audit of the Department of Land awarded more than
and Natural Resources’ Land Conservation Fund, issued in January 2019. $47.3 million to fund
58 projects. By
Expenditure Cap Contributes to Growing Cash the end of FY2017
Balance awards totaling
$11.9 million were
Up to $6.8 million1 is deposited into the Land Conservation Fund (LCF) still pending.
each fiscal year to support Department of Land and Natural Resources’

1
The primary source of funding is 10 percent of the State’s conveyance tax revenue or
$6.8 million, whichever is less.

COVID-19 Report No. 20-07 / May 2020 11

Review of the Department of Land and Natural Resources’ Land Conservation Fund

(DLNR) Legacy Land Conservation Program, but expenditures from

the special fund are capped at $5.1 million per fi scal year. This budget
constraint limits the amount of moneys available to the program, but it has
also caused the fund’s cash balance to nearly double over fi ve fi scal years –
from $14.1 million in FY2013 to $27.8 million in FY2017, of which
$16.6 million had not been earmarked for projects or program expenses.
As of May 6, 2020, the fund balance was $33.2 million, according to recent
data we gathered from the Department of Accounting and General Services’
Financial Accounting and Management Information System (FAMIS).

Moneys for Pending Projects Can Languish for

Years
State agencies, counties, and nonprofi t organizations apply for grants from
the Legacy Land Conservation Program to acquire land or conservation
easements and for administrative expenses. Since FY2006, the program
has awarded more than $47.3 million to fund 58 projects. By the end of
FY2017, the Legacy Land Conservation Program had completed 31 of these
projects; 8 projects had been discontinued; while 19 others, with awards
totaling $11.9 million, were still pending. Of the pending projects, 10 had
tied up money for more than 2 years, including 7 grants to state agencies.
We found that, whereas the Board of Land and Natural Resources enters into
contracts with county and nonprofi t grantees that stipulate completion dates,
no such contracts are executed for grants awarded to state agencies. With
no completion requirements, grant-funded state projects can remain active
indefinitely, making earmarked funding unavailable for other uses.

Exhibit 3
Pending Projects by Number of Years Funded
6
projects

4
projects
3 3
projects projects
2
projects
1
projects

$6,876,596 $3,871,750 $1,193,450

Projects pending Projects pending Projects pending
< 2 years 2 - 5 years 5+ years
TOTAL $11,941,796
Nonprofit / County State
Source: Information provided by the Legacy Land Conservation Program
and compiled by the Office of the Auditor

12 COVID-19 Report No. 20-07 / May 2020

Exhibit 4
Fund Balance for FY2015-FY2019 and 2020 Year-to-Date
2015 2016 2017 2018 2019 2020 YTD

Beginning Cash $16,283,703 $22,415,657 $19,429,704 $20,567,919 $27,276,738 $35,161,509

Revenues $7,975,152 $6,742,309 $6,965,748 $8,605,754 $10,589,066 $5,663,553

Expenditures $1,869,784 $9,728,261 $5,827,533 $1,896,935 $2,704,295 $7,650,584

Cash Transfers $26,585 $0 $0 $0 $0 $0

Encumbrances $11,554,163 $4,695,000 $3,968,531 $8,691,344 $11,073,979 $3,900,737

Ending Cash $22,415,657 $19,429,704 $20,567,919 $27,276,738 $35,161,509 $33,174,478

About the Fund

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 – 10 percent of conveyance tax collected –
and repurposed an existing fund, renaming it the Land Conservation
Fund, for the express purpose of acquiring land with value as a state
resource. The Land Conservation Fund and the associated Legacy Land
Conservation Program are administered by the Department of Land and
Natural Resources, which delegated that responsibility to its Division of
Forestry and Wildlife.

COVID-19 Report No. 20-07 / May 2020 13

Review of the Department of Land and Natural Resources’ Land Conservation Fund

14 COVID-19 Report No. 20-07 / May 2020