The Grand Skim of Things, Part 3

We continue our discussion about the 5% charge assessed against special funds in Hawaii government, also known as the “Central Services Skim.”  Last week, we examined the exemptions from the skim and the danger that the funds who are paying the assessments can claim that they are being gouged.  This week, we look at the one State department that has funds with no exemption, and refuses to pay it:  the Department of Hawaiian Home Lands (DHHL).

When the State Auditor published recommendations in 1994 relating to the Central Services Skim, it included one saying that DHHL wasn’t paying it but should.  DHHL published a rebuttal arguing that the Central Services Skim assessments violated the Hawaii Constitution, the Hawaiian Homes Commission Act of 1920 (HHCA), and our Admission Act; and that the funds were trust funds to be used exclusively for the benefit of native Hawaiians.  DHHL’s most recent audited financial statements, for the fiscal year ended June 30, 2016, indicates that it still doesn’t believe it has to pay.  The financial statements estimate that the cumulative total assessments that it has refused to pay is about $24 million.

With that, we examine the arguments DHHL has made.

Concerned about the condition of the native Hawaiian people, Congress enacted the HHCA to set aside about 203,500 acres of ceded lands for native Hawaiian homesteads.  Section 213 of the HHCA established several funds, including the Hawaiian home administration account, the Hawaiian home operating fund, the Hawaiian home receipts fund, the Hawaiian home trust fund, and the native Hawaiian rehabilitation fund.  As originally enacted, all five were special funds.  Act 27 of 1998 purported to reclassify four of them as trust funds.

When the State of Hawaii was admitted to the United States in 1959, section 4 of the Admission Act provided that the HHCA would be adopted as a provision of the Hawaii Constitution, provided “that all proceeds and income from the ‘available lands’, as defined by said Act, shall be used only in carrying out the provisions of said Act.”

In 1978, the Hawaii Constitutional Convention, worried about the chronic underfunding that the Hawaii Legislature had given DHHL for many years, recommended a constitutional amendment that required state government to appropriate “sufficient sums” to fund it.  The effect of that constitutional provision is now being litigated in the court system in a case named Nelson v. Hawaiian Homes Commission.  The court decisions so far have indicated some willingness to force the Legislature to appropriate more money to DHHL than it historically had received.

DHHL’s arguments appear to be both textual and practical.  It first argues that the texts of the HHCA, Hawaii Constitution, and laws prevent the diversion of HHCA assets to purposes other than those authorized by those laws.  It then says that DHHL has been fighting for years to have the Legislature fund it adequately as the Hawaii Constitution requires, and the Central Services Skim would force many more dollars to go in the wrong direction.

The textual arguments do not seem to be airtight.  Section 213(f) of the HHCA expressly allows the Hawaiian home administration account money to pay for “salaries and other administration expenses of the department in conformity with general law applicable to all departments of the State.”  If DHHL is deriving benefits from central services provided by other state departments, that language would allow the account to pay for them.  The more general argument about the funds being bound to a specific purpose doesn’t seem to hold up; the funds need to continue to exist, the programs they support need to employ people, and the people need to be hired and paid.  If the funds are accepting benefits from State central services, it is fair that those benefits be paid for.  Even the federal agencies administering the transportation-related funds allow their funds to pay for central state government expenses for this reason.

The more interesting question, however, is the practical one.  If the State ultimately is found to have been shortchanging DHHL unconstitutionally, then it will have to make things right.  Consideration for any central services benefits DHHL received would be proper, but the overall shortfall, which appears to be considerable, may be enough to justify, at least to some degree, DHHL’s refusal to fork over the skim amount.

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About Tom Yamachika

Tom Yamachika
Tom Yamachika is the President of the Tax Foundation of Hawaii, a private, nonprofit educational organization dedicated to informing the taxpaying public about the finances of our state and local governments in Hawaii. Tom is also a tax attorney in solo practice and has been since early 2013. Prior to 2013, he was with the accounting firm Accuity LLP, which was formed in 2006 from the Honolulu office of Coopers & Lybrand (which later became PricewaterhouseCoopers). Before that, he served as an Administrative Rules Specialist in the State of Hawaii Department of Taxation from 1994 to 1996, where he drafted rules, interpretive releases, and legislation on several different state taxes. Prior to that, he practiced litigation and tax law with Cades Schutte Fleming & Wright in Honolulu.

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