A recent, eagerly awaited independent financial review of the Office of Hawaiian Affairs (OHA) has been in the news lately.  The review, conducted by the California-based accounting firm CliftonLarsenAllen (“CLA”), made several observations and recommendations, including the flagging of 32 transactions, representing $7.8 million, as potentially fraudulent, wasteful, or abusive.

Indeed, of the 185 transactions the firm reviewed, it had audit observations, meaning that “the results of testing revealed occurrences of noncompliance with statutory requirements and/or internal policies” or “that revealed indicators or red flags of waste, fraud, or abuse,” in 85% of them.  The transactions reviewed were not random but were those that the firm suspected would have a greater chance of irregularities.


OHA’s chair of the Board of Trustees and chair of its Resource Management Committee issued a statement pointing out that the report “did not identify actual instances of fraud, waste or abuse.”


Sure.  That wasn’t CLA’s job.  They’re auditors, not prosecutors, judges, or juries.  What they did observe in many instances, however, was very troubling.


Page 94 of the report, for example, mentioned a contract with Absolute Plus Advisors under which OHA paid $181,499.  It was supposed to be a contract for the vendor to provide the Trustees with quarterly reports on OHA’s Trust Fund and on its Trust Funds Advisor, sort of like having the vendor keep an eye on the firm who was keeping an eye on OHA’s money.  OHA had the contract but had no documentation either of competitive bidding for the contract as required by law, or of any deliverables under the contract.  So, the money was spent, but it wasn’t clear if OHA got anything it paid for.


Page 117 of the report described a contract with Mid-Continent Research for Education and Learning to provide consulting services.  The contract was signed for an amount just short of $100,000 but was amended to increase the contract price to $349,527.  Procurement documents such as bid evaluations were nowhere to be found; nor could OHA staff find any of the deliverables related to this contract.  So, about $350,000 went out the door and OHA might not have gotten anything in return.


Trustee Keli’I Akina (who, by the way, should be commended rather than pilloried for his role in getting this financial review done) put together and published a digest of the CLA report called “Red Flags: An Analysis of the Independent Audit of OHA and its [Limited Liability Companies].”  The digest includes descriptions of these financial anomalies and many others.


Yes, the reports describe the smoke, but not the fire.  They don’t accuse anyone of committing fraud or other wrongdoing.  There may be instances of ineptitude or mismanagement, which would be deplorable but not criminal, or grand theft, which would carry more severe consequences.


So, we need to seriously consider going to the next step.


OHA would be prudent to consider taking this report to the law enforcement authorities who would be able to investigate whether any of the conduct described in the report rises to the level of criminal conduct, such as fraud, theft, or bribery.  OHA, you may remember, is a state agency and is funded with taxpayer money from all of us.  All of us get to vote in (or vote out) OHA trustees.  Thus, crimes against OHA are crimes not just against the Native Hawaiian beneficiaries but are crimes against all of us.  If it is determined that crimes were committed, the perpetrators need to be brought to justice.

​ Let's Not Tax Transportation
By Tom Yamachika, President, Tax Foundation of Hawaii

Some folks ask me if I have any radical ideas to change the tax system in Hawaii.  Here’s one:  Stop taxing transportation of goods and people.

Before you stop laughing uproariously, though, consider this.

First, we can’t tax air transportation.  There are federal laws prohibiting us from applying a gross receipts tax (like our General Excise Tax) to transportation charges.  Back in the late 70’s and early 80’s, we tried to tax air carriers by imposing our Public Service Company Tax, which applies to public utilities in lieu of GET.  We were very creative.  The Hawaii Supreme Court held, and our state told the U.S. Supreme Court, that our tax was actually a tax on real and personal property (which was allowed), but because it was so difficult to value the kinds of property that utilities had, like airspace rights, rights-of-way for power and cable lines, or easements for water pipes, the tax used the gross income of an airline as a proxy for valuing its property.

The U.S. Supreme Court didn’t buy the argument.  “It’s still a tax measured by gross receipts, which is a gross receipts tax under federal law, and we get to interpret that federal law,” they said, in effect, in a unanimous 8-0 decision in 1983.

Despite this ruling, zealous tax auditors still tried to go after helicopter tour companies and those companies pushed back, leading the Department of Taxation to rule, in Tax Information Release 89-10, that those gross receipts were immune both from the Public Service Company Tax and the GET.


There are also federal restrictions on taxing transportation by water.  Federal law prohibits anyone other than the federal government to tax a vessel, its passengers, or its crew while the vessel is operating on navigable waters.  In 2010, our Intermediate Court of Appeals ruled that the GET as applied to charges for chartering a sport fishing boat was valid because it was a tax on the business and not on the vessel, passengers, or crew.  The court reasoned that the federal law was meant to prohibit fees and taxes on a vessel simply because the vessel sails through a given jurisdiction and didn’t mean to affect whether sales or income taxes can apply in general.  The Hawaii Supreme Court declined to review the case, as did the U.S. Supreme Court.  So, GET can be applied to transportation by water, at least for now.

In the meantime, fine distinctions are already being made.  In cases involving UPS and Lynden Air Freight, the Hawaii Supreme Court held that when a shipper pays for a shipment to go from your office to your counterpart on the Mainland, GET can apply only to the transportation by ground between your office and the airport.
 
In short, the landscape here is filled with complexity and disparities between transportation industries.  Are there good reasons why, as a matter of tax policy, we should tax water and ground transportation when air transportation can’t be taxed?  (Other than, “Because we can.”)  We’re an island state.  One of the reasons often given to explain our astronomical cost of living is that goods and people need to be shipped in and out, and that isn’t done for free.  So, what would happen if the tax goes away?  The industries would compete on a more level playing field, residents would feel some relief in the cost of living department (or at least sellers wouldn’t be able to use the tax as an excuse), and the government revenues might not go down because fewer costs may lead to more buying, and thus more total revenue subject to GET taxation.

Good idea, or the ravings of a madman?  Let the debate begin!

This week we focus on our safety net systems for people or families in need.  In the early 1990s, a major part of this net came from the federal Aid to Families with Dependent Children (AFDC) program, which matched state dollars of financial assistance for a needy family.  That program was replaced with what we have now, Temporary Assistance for Needy Families (TANF), which is a federal block grant program that, at least in theory, gives states a substantial amount of federal money for purposes like cash assistance, work activities, work supportive services, and child care.

Hawaii gets about $99 million a year under this program.  In 2017, it spent $52 million in federal funds while it spent about three times that amount from its own funds.


That means there was $47 million in federal money left over just from that year.  A state can (at least for now) carry the money over to future years, but…as of last year, Hawaii had $281 million in unspent TANF money.  That means our state was underutilizing this money on a consistent, year-to-year basis.


A post on the website efficient.gov quotes an assistant division administrator for the Department of Human Services as saying, “I’m concerned the reserve is larger than it needs to be.  I do worry that if we don’t spend it, then our clients aren’t benefiting from it.  We definitely need to make changes to get that money out the door.”


The federal program also has what is known as a maintenance of effort (MOE) requirement.  It says that states must maintain a certain level of state TANF spending which is based on a state’s spending for AFDC and similar programs before TANF was enacted.  In other words, we needed to and did spend our taxpayer dollars on this program while we left the federal money on the table.
​

Worse, a good chunk of the federal dollars we did spend were spent in a questionable place—at least in relation to the purpose of the TANF program.  The Center on Budget and Policy Priorities stated that nearly $32 million of TANF money was spent on the University of Hawaii.  Perhaps the justification was that the dollars went to financial aid for needy students.  But CBPP pointed out that this “funding served families with incomes up to 300 percent of the federal poverty line and was not focused on helping TANF cash assistance recipients prepare for work.  In comparison, the TANF benefit level for a single-parent family of three in Hawaii represents 31 percent of the federal poverty line.”


Not only that.  Another central principle behind the TANF program was that states could spend more of the funds on child care subsidies — which are essential to enabling low-income parents to work — rather than on direct financial assistance.  Nationally, states spent about 16% of TANF money on child care.  Hawaii spent just 5%.


So here we have a double-edged problem.  We aren’t spending the federal money we can get, thereby increasing the burden on local taxpayers.  We are spending the money on programs targeted not just to the poor, and we are as a result shortchanging the effort to get people off the dole and into the workforce.  To put it another way, the money intended to help the poor is being skimmed off to do something else.


Lawmakers, wake up and smell the plumerias!   Let’s get some of this federal money pulled down.  Let’s get our state money directed to where it is supposed to do the most good.  Maybe we can even use it to combat our homeless crisis!