Senate Standing Committee on Ways and Means

Okay. Calling the 12:30, meeting to order. This meeting, including the audio and video of remote participants, is being streamed live on YouTube. You will find links to viewing options for all Senate meetings on the live and on demand video page of the legislature's website. In the unlikely event that we have to abruptly end this hearing due to major technical difficulties, the committee will reconvene to discuss any outstanding business on Tuesday, April 28, 12:30 in this room.

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If there are temporary glitches during your turn to testify, we may have to move on due to time constraints. We appreciate your understanding, and we have your written testimony. If you're interested in reviewing written testimony, please go to our website. You will find the link on the status page for each measure. Okay.

Mark. GM five twenty. Mark Fukunaga. Must've been on Zoom?

Yes. I don't know if you can hear me. The video. I'm trying to start the video. I'm, my apologies. I'm in Beijing right now.

So I think the. I hope you can hear me, but the video doesn't seem to be coming through.

Okay. We're just gonna move on, and hopefully you can figure out your technical glitches by the time we end.

Okay. Will do.

Okay. Next, GM 521, Stacey Katakura.

Hi. Good afternoon. My name is Stacey Katakura, and I'm honored to appear before you today in support of my confirmation to the Tax Review Commission. I began my career at in tax at Ernst & Young, which makes this appointment feel like I'm coming full circle.

I went on to serve as CFO of Forest City Hawaii overseeing over $2 billion in real estate developments and over $1.4 billion in private bond financing with government partners. For the past nine years, I've led Accumulus Advisors, right, working with nonprofits and small businesses across our states.

I hold an active CPA license in Hawaii. That experience gives me a practical understanding of how tax policy is written, how it is implemented, and how it affects real businesses and families here in Hawaii. I'm deeply committed to this community, and I'm ready to serve. And I respectfully ask for the committee's confirmation. Mahalo.

Okay. We have DOTAX. Evan Leong. Jon Wallenstrom. Karen Mukai. Cayenne Pe’a. Ellen Ng. Okay. Anyone else wishing to testify? Any questions? No questions? Okay, Stacey. I just have a couple questions. In your analysis of some of the taxes that are in place now, have you reviewed them? And do you think you're gonna be making any suggestions as to how some of them should be either restructured, sunset, expanded?

Yes. I mean, I have a general, I think, overview understanding of the tax policies in place right now. The commission is currently under, considering a consultant to do a study on the tax structure and policies and how to make them a little, what would be the most competitive and efficient changes that can be made. And I look forward to working with the commission to kind of see the results of that study and making some recommendations.

Okay. So if all we're gonna do is outsource to a consultant, why do we need the commission?

Well, I think the commission is going to be putting together some specific items to...

But which tax like, for instance, in your mind, as you review if you review certain taxes now, which specific ones stand out to you that you think should be revisited?

I think there's some changes recently to the, for example, the Transient Accommodations Tax. That would be I think it would make some sense to to study study the the tax a little bit further and how its changes have maybe influenced tourism as an example.

Okay. But where do you where do you believe we can provide tax relief? Where can we generate revenues that where those taxpayers can can handle and be contributing to state services, and others who who have who are struggling, they might need some relief.

Well, I think that's a good, I think that's a good area for the some for some economists to study, and kind of and put forth to the commission to review.

Okay. I'm not asking that you have the commission. I'm asking your opinion. Because if all you're gonna do is refer and defer to the commission, we need critical thinkers in there that are gonna be able to to do things more proactively instead of just waiting for a commission report.

Yes. I understand that. I do think we want to look at some of the regressivity of the taxes and ways that we can make further some of the policies of the government in terms of affordable housing. I think there's a lot of different different avenues to consider.

Yeah. So can you name one specific tax where you can try to make that adjustment or suggest adjustments?

I think the two majors the largest tax sources are the income tax and the general excise tax. I think the income tax might have the and, you know, there might be some credits that we could look at to implement to the lower income households.

Yeah. So what would be some of your suggestions on the income tax?

We could, like I said, maybe look at some tax credits, income tax credits to lower income families.

Okay. Except if you talk to DOTAX, low income families who have tax credits barely apply for tax credits.

I have, I honestly, I have no comment on that.

Okay. Any other questions? Okay. Next item, GM 522, Jessica Enos.

Yeah. Yeah. Just come forward. State your name. Explain why you wanna be on the tax commission, why you're qualified.

Yeah. You can sit. Yeah.

Yeah. You can see it. Yeah.

Do I sit? Or

Okay. Sorry.

Hi. Hi. My name is Jessica Enos. Born and raised in Hawaii. Graduate of Iolani. I dedicated my entire career to public accounting. I've, been doing this for about twenty seven years now. Started off at Arthur Andersen, and I've also been at KMH and, excuse me, KPMG. And I've actually had my own practice now for the past eleven years. I in past years, I have done been a coauthor of the taxes of Hawaii handbook, and I've done general excise and use tax seminars.

So based on my career, I I believe that I have the experience to make some meaningful input into the current tax policy. So I look forward to your confirmation. Thank you.

Thank you. So when you meant when you said meaningful input, can you give us some examples of that?

So meaningful input, meaning that, basically, from a lot of times, laws are created or or tax taxes laws are created, but, generally, you don't have as much of the lens of the CPA, the actual administration, like putting, you know, law onto paper or getting things filed, how to work with, the taxpayers if audits come up between the taxpayer and the

So give us one example where you reviewed a specific tax in law and how it would be amended to address the concerns you're bringing up.

So, like, for example, there was a law before that, it years ago, actually, that put into place a requirement for nonresident withholding on partnerships with or flow throughs that had nonresident partners. And, yes, that's a great idea to collect, and most states do collect taxes from nonresidents to make sure that the state collects the taxes owed to them. But at the time the law was passed, the formalities of it weren't done yet.

So it it took years to actually put forms in place, which now they are in place. And so now, you know, we're working through that.

But, yeah, there was a lag between law and actual implementation because I think you need somewhat of a CPA lens to go in and and sort of explain, like, this is a partnership return. This is what would be missing. Like, you can put a law, but how how do you actually administer it? And so I think that we can having a CPA lens would help to put input into how that becomes formalized.

Okay. So do you see that the case with all laws, or how many do we have to make sure?

Not all laws. I mean, we do have a very competent tax department, you know, that has, you you know, done done their job of doing all that. But there is also a different like, the actual practitioners doing it is different from the people making the laws to the people that are writing the forms, and I I think it's good to have input to connect, connect them.

What would be, like, top some of the top three concerns you think that need to be addressed? Because right now, the sounds like they're gonna be a consultant. But if a consultant doesn't have any guidelines, they're just gonna start to Yeah. So all create a report that may not be meaningful or useful.

So if if the commission specifically specifically has concerns that need to be addressed, then they can narrow the scope for the consultant to do more research.

Yes. So we have discussed as a commission, what we would like the consultant to focus on. And our plan is to get that report and basically fine tune it to come up with proposals. You know? Yeah.

So what would be some of those concerns?

So some of the things that I was looking at into was tax credits. Basically, the effectiveness of it. And that's something that needs sort of an economist's viewpoint, which I'm not an economist. So that's where we would take the information received from the consultant and see, you know, is it is it effective? Is it doing what the the lawmakers intended for it to do?

Is it reaching the target audience? Is it doing what it's intended to do for Hawaii, for the the industries, and so forth? So that's why I think the the connection between us hiring a consultant and, you know, then taking that information, putting the input of the commission to it, and formalizing an actual proposal of what we think could be addressed or arranged or anything.

So how long should a tax credit for a business for a specific industry be in place?

I would think as long as it's working for the state and for the taxpayers, I don't I don't think we would need to sunset it, I mean, if it's working. But I think that when it when it gets to a point

It depends on the purpose. Right? Because if a certain sun's if a certain tax credit is to get the industry going, it's not supposed to be that we're subsidizing the industry.

So so your frame of mind is that we should be subsidizing industry?

Yes.

No. So that's my what I'm saying is, like, that's why from an ecommerce standpoint, the tax credit can subsidize the industry, but does that industry

We should be getting ourselves out of tax credits. Right? You're getting things moving. You're helping start specific industries so that they can reach scale. That doesn't mean that we should be subsidizing them forever.

I don't think the tax credit the and I I guess that's where the reports come into play because I don't think that a tax credit is only to subsidize an industry because industries bring in jobs, bring in and create jobs.

Still subsidize the taxpayer. People

But but then there's there's other taxes that get incurred when people come. Right? There's general excise tax. There's jobs being created for taxpayers to to live in Hawaii. Yeah.

So give me one example where we should be ending one, and give me an example where we should continue one.

So let me see. So I guess I don't know about ending with

I think we might have to have another

Oh, sorry.

I think some of I think some of the the nominees might have to go back, think about some of these questions, and then come back to the committee and give us more thorough and complete answers. So you might wanna think about that.

Think about which credit should end and which credit should

Well, it's you guys can be prepared for these questions because, you know, we are looking at sunsetting some credits. Some credits have been on the books for over fifty years.

Yes. And I I do agree. Yeah. If it's not doing any good or if whatever it was designed for has been accomplished, I think it can be removed.

Yeah. So what I'm asking is give me an example of each.

Okay. Yes. I have not gone through the the schedule to answer that question in particular right now, but I know that the the intent of the consultation with the economists was to see, you know, are the certain tax credits working and accomplishing and what they were they are intended to do and to assess, like, competitiveness of it across other states. So, for example, you know,

Like, but what about if we have a tax credit that now so you go to the PUC, for instance. Some some specific energy technologies don't have a tax credit, and others do. So now government could be picking and choosing winners and losers because now the ones we provide tax credits for have a competitive advantage because of the tax credit when other technologies don't have the tax credit and so they're less affordable. So how does that work?

So I hear what you're saying, but then now when you're looking at it from a overall industry like energy, that's not that may not be fair.

That may not be real transparent as to what's the real cost of that specific technology because of the tax credit. So if we if we did that that evenly across the board, then you could look at it fairly. But when you start to just pick and choose which technologies are gonna have tax credits, then now it's no longer a sphere.

Yes. I mean, I I I see what you're saying. And so we I mean, part of what the commission was looking at was credits amongst other things. And so

So what about new credits? So if we're trying to diversify our energy portfolio, for instance, how long does solar have to have a tax credit? Why can't we start giving it for hydro? Why can't we start doing it for geothermal? Why we have we're trying to diversify that portfolio, but we're only gonna give it to one technology.

How does that diversify the portfolio?

Yeah. I I would say that given it to just one that's not diversified, that was honestly not we were not particular looking particularly looking at the energy pool of possibilities and how there's only, you know, solar. But if that was something that the Senate would like us to look at, I'm sure we could add that word.

Well we want you to do the best job you can.

Yes. And tax is very broad, so it's hard to, you know, tackle everything. I know we had there was, long term care that was, for us to look at, but I think there's another bill going through. There's housing issues. There's the regressivity of the the tax structure.

There's so we, as a commission, we're trying to narrow down. Okay. What are we gonna focus on that we could add value to versus possibly relooking at things that maybe other people are already looking at? You know, I I would assume that the energy industry has a good bunch of lobbyists that might be looking at all of that. I mean, we we were looking at, like Stacy mentioned, transient accommodations.

We're looking at just and the credits. We we did discuss some housing, but housing is looked at a lot too. So we think we've caught it by looking including a piece of it sort of into what we're looking at in total. But

So how do you determine what you think is gonna be most useful to help assist the legislature?

Well, we are committed to so we gather as a group. We kind of discuss everybody's everybody had a little bit of input to say what they think we should look at. And I'm

But your comment earlier is how can you be help help the legislature?

Yes. So

But if you're working if you're discussing it, working it in a vacuum, guessing what you think the legislature might need help with versus just asking for a resolution, asking for letters from the legislature. Like, I'm trying to connect how you guys in a group are guessing or trying to be helpful, but in it seems like it's in a vacuum.

I I think we have a wide range, a a pretty diverse group, different backgrounds that I think, add different different opinions.

If you wanna be helpful to the legislature, why not ask the legislature where would you want us to look at? What are some of the things you guys want us to consider and review? Why I don't understand how you're you're in a you wanna be helpful, but you're just your small your commission internally talking about it versus asking the legislature how we can be helpful.

Okay. My apologies for that. I thought that we I I thought there was some instruction to look at long term care. And other than that, I thought we were just looking kind of in general at the tax policy and structure and how we could provide input to improve it. And and, yes, we could definitely come back to the legislature and

ask trying to figure out what would be the means of communication. Is it a memo? Is it a resol? Is it a info briefing so that we can actually have a meaningful dialogue with the commission to say, this is what we would like you to review that where we think we we need help, and it would be useful for us. Yeah.

I am so sorry. I'm not I'm I that seems so in my CPA lens, this is kind of a foreign territory to me.

So, yes, absolutely. If we should be in contact with you to get exactly specifically items that you would like us to look at, I will go back to the commission. And at our next meeting, we will discuss that to figure out what is the best way to have communication between us and the legislature. I mean, I don't think we intend to leave you guys out.

Our hearts are here to, you know

No. I'm not I'm not second guessing that. I was just trying to understand if the if you're discussing it internally without specific input from the legislature, how do you make sure that that's a there's alignment?

Yeah. I I sorry. I don't exactly have an answer for that. I I thought it was, like, a a delegated task, and so we were going to

Delegated how though? That's what is it a memo? Is it a reso? Is it a info briefing?

I I thought it was the creation of the tax review commission, and that was our delegated task. And so we met and to look at tax policy and procedures and

Okay.

Make our analysis. And and my apologies if we should be in contact with you guys, you know, as we meet. Yeah. We'll definitely make sure that gets done.

Okay. Any further questions?

I'm not sure if it's a question. Hi. Here are the questions that that Senator Dela Cruz is asking, but my concern for the commission is that besides looking for the tax credits that maybe gonna have a sunset date, What about all the tax revenue that we're not collecting? Is that part of you guys commissioned to look and review of all the money right now that people from Hawaii is not paying their taxes in the billions from what I heard?

Are you guys gonna review something like that that you guys gonna look on how we can collect it? Another question would be hearing that after so many years, the tax they don't go after people that owe tax. Is that is that something that you guys review or look through?

That was not something that was on our task, and that is not something that that we've considered looking into, but we can, like Senator Dela Cruz mentioned. You know, if in in speaking with the legislature that is something you would like us to look into, we can. I but, yeah, the tax it's not like I guess we we're not limited to looking at only specific things.

So if that is something that the legislature would like to use the tax commission to review, I think we can look into it. And we work with, the tax department and and their support because we'll need their support.

I'm I'm not sure how we how we would find that information. I guess maybe that's policies on increasing ways of finding these people and getting them to pay. I we have to

Hold on. First person that you Said the same thing about consultants. To me, I'm consulting, consult only in the information that they get. And I don't since I've been here, I don't think any consultant really did justice for the people of Hawaii, caused a lot more problems. But, again, we're always having to converse in consultants.

So, again, as Senator Dela Cruz said, if we get consultants and consultants over consultants, then why we need you guys?

Well, we our plan was to take the consultant's report and come together with a proposal to the legislature. I I am not an economist, so I have a CPA, a practitioner lens. I know we have there's a few of us CPAs. There are practitioners. There's an attorney.

You know? There's another member that's in multi state tax. So there's different eyes that I think will then take the report received, filter it through all our lens to put together something meaningful that hopefully will, you know, be meaningful to the legislature and be able to make a difference. I I certainly hope you know, that's that's our goal is to make a difference and not to just have a consultant after consultant and get nowhere. I mean, I don't like to pay consultants for nothing either.

Thank you, chair. Appreciate it. Thank you. Thank you.

So do you know how many I know the last report from DOTAX for tax credit, the distribution of tax credits. How much was spent on tax credits?

That was one of my questions on, you know, how how much was it? Like you know, and I I don't know where the information is gonna come from. I don't know who gathers what information, but I did ask about, like, how much was the credit, you know, how how much does it how much does it cost the state. But on the flip side, how much revenue did it bring in? So I don't know the answer.

Okay. So DOTAX has a report from distribution of tax credits in tax year 2023. They've calculated 621,200,000 in tax credits. 621,000,000. Do you know how many in GET exemptions are claimed by business activity in 2023?

No. That is something else that

Okay. It says 38,100,000,000. So that's according to DOTAX report.

So that's a lot of money. And I'm you know, we just wanna make sure that there is a return on investment. If not, we have to start looking at this because we're spending on them, and we can't provide the tax relief that we need to working families.

Yes. I understand. So, yeah, I mean, yes. I I think we can circle back with the legislature to ask, I think, what what areas in particular you would like us to focus on. Because, yes, tax is very broad, and we we have GET and GET and use tax has their own exemptions to look at income tax and and related credits, different industries.

It it is it there's a very broad range of subjects and topics to look at in sort of a minimal amount of time. My understanding is we're trying to get through this by end of year to have the proposal ready for next year's legislative session.

So what about the review of tax credits? Because there has been some discussion about, for instance, motion picture. That people are claiming for the the tax credit, but the review of the tax credit maybe had not been as thorough as could be. And when people are trying to turn in receipts or turning, you know, their whatever they're claiming so that they can get the credit, the review process. Is there have you looked at how each department

That's what I'd like to look at. I'm sorry.

Are you so are you saying the Department of Taxation's review of the film credit?

No. It's not. So it's not just department of taxation.

I'm sorry. The the

It's the Department of Taxation and the specific department that that that manages that specific industry. So for instance, motion picture would be DBED. What's the process? Is it consistent throughout the state? What to make sure that it's transparent, it's clear

Yeah.

Documents are the same, the forms are similar.

So I did want to take a deeper dive into film credit. That that was one of my things that I I had wanted to get looked at because, yes, that that does involve DBEDT, DoTax, and a taxpayer, and it and you needed outside consultants to review your credit claim, and then there were additional claims. And it's a very highly it's a highly debated credit, and we've seen

the film industry come to Hawaii and you've we've seen them leave. And so we wanna look at I want to look at, you know, sort of what role did the tax credit play in that, you know, and among other things. And

So you've been on the commission. So what what's the criteria that you use that you're gonna do this study or that study, and and who does the scope of when you do hire a consultant?

So we have our our our chairperson that lead leads, and and we we have an agenda. And it our our meeting started off with the like, I guess, a general overview of the different, like, tax systems in Hawaii. And and then we had an opportunity to, you know, discuss sort of where we thought we could add input or what we thought could be researched or looked into and stuff.

And then we have, you know, an interactive session with feedback with whether, you know, we should go down that road, look deeper into that, or if, like, you know, housing is a big topic. There are many people looking into housing.

Maybe we don't need to duplicate our efforts. We only there's only seven of us, and we only have so much time. Maybe let's focus on something else. So with back and forth discussions, we've tried to fine tune, you know, what we're gonna, you know, what we're gonna look at and what also what we would like the consultant to look at.

What is the criteria? So is it efficiency? Is it revenues? Is it making sure everybody, you know, pays taxes?

Yeah.

What what what criteria does a commission use in selecting we're gonna go down this avenue or that avenue?

I guess, is it bear? Is it doing what it's designed to do? Is it effective? Yeah. I guess effectiveness, equitability, is it equitable?

Is it fair?

So if you're looking to say you're saying we're gonna look at tax credits this year. Alright. What are the criteria that makes you go down to tax credits versus GET versus income tax? What what do you, as a commission, look at as a criteria? Okay.

We're gonna focus on this, and this is where we're gonna focus. We're gonna give a scope of work to a consultant to get us information. We're gonna ask DOTAX to get this from the departments or you go to different departments to get information. What is the process that you, as a commission, do so that we can get some reports out that are things that we can do something about?

Yes. So yeah. I I don't know. I I guess I'm not sure how to exactly explain it well. I guess we we just each had input on what we thought should be looked into, and I guess other members had experiences and either agree that, yes, that's a topic that should be looked into versus maybe that's a topic that other people are spending their time on, and we don't need you know, we shouldn't focus maybe to do to avoid duplicating efforts.

But I'm sorry. I'm not super I'm not familiar at all, I guess, with the process of the interaction between tax review commission and legislature. I I did not realize that an ongoing thing that we work in tandem. And if that is the case, yes. I I mean, we we should, at our next meeting, regroup and create a communication line and definitely, you know, get, like, have a communication line that will make sure that we are focused on the same things.

If your report comes to us, if we look at that, we say these are changes that we should make. It's coming as a tax review commission recommendation. So there should be some idea of what would be helpful for us to get information on.

So I don't

know if Yeah. Does Department of Taxation, DOTAX help you in terms of giving you, like, reports

To chairs?

Yes.

Yes. So there are there's some information that DOTAX has. There is some information that the tax research and policy division has. And so, you know, for those things and they will say so they're they're on our our call. They're in our discussions. So they'll say, yeah.

We don't need the consultant for that because we have those reports internally. Or they have the research guys have the history of previous tax review commissions, and they'll say, okay. That topic has been looked at in the past in, you know, whatever one or two commissions ago, and that was already discussed. I can't remember what it was.

But, you know so they're there to facilitate also to make sure that we one, we don't duplicate effort efforts, and one, we don't hire consultants when they'll the information is available just by asking them.

You know?

So when the re report comes back, you the commission does the analysis. I mean, you

Yes. That is the plan.

This is what needs to be and the recommendation comes to us, and this is missing or this is what we need to do.

Yes. So the plan was for the commission to receive the report or reports from the consultants, analyze it, and put together a a proposal to improve the tax policies.

And so, again, the criteria that you use to come back to the legislature say this is why we need to make this change is something the commission is working on. What criteria do you use in term and equitable and so forth? But what do you look at in terms of these are it rises to the top of what we need to do because this is a problem.

Yeah. I I guess

To each of the com the nominees

If you don't know, we can you can just we'll gather a lot of these in writing, and then we'll send the same questions to the

Okay.

Okay.

And give them time to respond.

Okay. Just short. Yes. Yes. And thank you, and congratulations, and good luck to to the work before you folks.

And the chair had a had a good comment with regards to the role and the purview that the Commission should look at. One thought is, you know, just looking at the $38,100,000,000 in tax credit. So already we can see that one role that the Commission can do in the next year or so, give us an idea what tax credits should be either rid of and or a percentage cut off or put a sunset date.

So I think that we probably should be ongoing, you know, through the years. But another thing concerning is, chair, I think the commission right now is, expiration of May 2027, and I'm not sure if that's a good period for you folks to get the information together.

But if you're looking at May 2027, the session starts in June, January 2027, and for a review of the outgoing commission members, it would be better for us to get that kind of information. But certainly, looking at the G exemptions, it's really important that you guys look at it, sunset some, whatever, cut back, and give us a you know, the information, and that would help. And exact and as an example, right now, you know, technology is so ahead of all of us.

Like, with even with DBEDD and, like, for me, people are already coming into the state looking at spaceports.

And so, but they're coming to us to get these bills passed, you know, for some kind of tax credits, and I'm sure others have the same opinions like energy, but, you know, it's good if we have, you know, what what you can provide us so we can make those decisions, but just to you know, that should be utmost importance every so many years that the commission should review tax credits no matter you know, you don't need to be asked.

Thank you, chair.

Thank you. Okay. We have one testifier, Dotax. Thank you. Thank you.

Thank you. Okay. We're gonna take things out of order because, some of the members have conference committee. So we're gonna move on to, GM 747, director of BNF, Seth Colby. Good afternoon.

Yeah.

Yep. Go ahead.

First of all, good afternoon, Chair Dela Cruz, Vice Chair Moriwaki, Members of the Committee. I really, really appreciate you guys taking the time. I know it's very busy time period of year. And so the fact that you're considering my nomination now is a great honor.

I mean, at first, I was told this was gonna be for May 4, and then I was gonna do, like, a little Star Wars references, and then I would get to say, may the fourth be with you at the very end. But we don't live in that timeline. Today's the 27th, and I'm applying for the cabinet position, not for the Council of Jedi, Jedi Council.

So thank you very much. Here's my more boring and traditional opening remarks. Thank you very much for your consideration of my of my nomination as Director of Finance. It is a great honor to be nominated by Governor Green to serve the people of Hawaii.

The Director of Finance acts as a principal custodian of states, of the state's financial resources, a role I take very seriously. And the reason I take that role very seriously is public money is sacred. Private commercial transactions are conducted voluntarily, meaning that both parties freely agree to participate in the exchange.

When I go down to my local supermarket and I buy a mango, I decide to go buy the mango and the supermarket decides to do that. Public money is not like that. Residents do not choose to contribute to the common purse, they are required to by law. That obligation demands that we must manage their money with the highest level of care and accountability.

My belief that public money is sacred guides everything I do in this role. I would like to take a few minutes to explain why I'm qualified for this position, the principles by which I plan to do this job, and issues I intend to address if given the opportunity to serve. I've served, first of all, let me start with my qualifications background.

I've served the state of Hawaii for nearly ten years, developing knowledge products so decision makers like yourselves can make more informed choices. As a at the Department of Taxation, I led the team that supported the Council on Revenues and generated accurate revenue estimates for the proposed legislation. I also served as the Chief State Economist at DBEDT, overseeing the production of economic research and statistics.

These through these positions, I developed a deep knowledge of the state's revenue system and the economy. Prior to coming to Hawaii, I worked in finance and development banking, and a big part of my role was designing and evaluating economic development programs for island economies.

My doctoral dissertation examined the circumstances under which governments can use public investment to catalyze private sector growth, a question that remains directly relevant in this role today. I come to this position with a solid understanding of the state's tax revenues, economy, the relationship between budgetary decisions and economic outcomes, and the fundamentals of public finance.

Beyond credentials, principles are very important for me and guide my work. The first principle that guides my work is what I mentioned at the outset. Public money is sacred. I replay, I repeat this often to the B&F staff, to partner agencies, to anyone who will listen.

This is not a slogan. It is a reminder of every dollar we manage was collected under the authority of law, and we owed the public nothing less than our full accountability in how we spend it. The second principle is information helps. Budgeting involves hard trade offs. When you fund one project, you don't have money, that same money, to fund another.

These trade offs are easier to evaluate honestly if we have data to do so. I spent most of my career providing rigorous analysis to decision makers, and if confirmed, I intend to do so as as director. Under my leadership at B&F, B&F would be a source of data and metrics that allow us and the legislature to evaluate the true impact of public investments.

The third principle is budget health is downstream of economic health. The state's revenue system sits atop the state's economy. When I was at Department of Taxation, there was a lot of concern and wrangle and debate over proposals that changed the revenue system by 40-50 million dollars a year. I often reminded everybody, a single percentage point of general fund growth is equivalent to a $100 million, and that compounds over time.

So as we wade into the details of budgetary line items, we must never lose sight of the larger picture. A strong economy is the most important long term driver of our fiscal health. In closing, I just wanna focus on three operational aspects I would like to give my focus if given the opportunity to serve.

The first is maintaining and strengthening the state's creditworthiness. B&F's primary purpose is managing the state's fiscal resources in the most financially prudent manner. Since I've been acting director, the department executed the largest bond sale in the history of the state, nearly $2 billion. In that process, we managed to get a GO Bond rating put on positive outlook, and our highway bond upgraded to triple a rating.

Now in public finance, that's most people don't understand that. But in plain English, what that means is investors trust the story of Hawaii more with their money, and they're willing to lend us money at a cheaper rate and save the taxpayers money when they trust our story. And that's what we've been managed to do in the last three or four months.

If confirmed, I will continue to leverage my unique background in economics, taxation, finance, and finance to negotiate the cost effective government services on behalf of our residents. Second, modernizing our budgetary system.

One of the first decisions I had to make as acting director was to launch a new IT project to build an automated budget management system that will replace our manually driven process that consists of Excel spreadsheets and email chains.

Centralizing budgetary information and integrated platform will improve processing speed, reduce error, and increase transparency. We are also supporting the statewide enterprise financial system and other technological initiatives that will strengthen how state government operates at every single level.

Technology, when used strategically, is one of the most powerful tools we can use to improve productivity of the state. Finally, I want to build our organizational capacity. B&F operates in a lead structure. Elevated vacancy rates even at the senior management level have created unacceptable levels of operational risk.

I've been working with our HR office. We've hired a new HRO and to anchor a broader effort to recruit, develop, and retain talent that this department needs. The next phase is filling the senior manager positions, and then we'll work our way down.

I'm committed to leaving this organization stronger and more robust than when I first joined. Should I be confirmed, I will work with this committee and the full legislature to be full to be responsible stewards of the public resources and to build a more prosperous future for the people of Hawaii. I ask for your support of my confirmation. Mahalo. Mahalo nui loa for your consideration.

Thank you. Members, questions? Senator Elefante.

Thank you, Chair. First of all, Dr. Colby, you know, congratulations on your nomination. I know we didn't have any opportunity to meet prior to this hearing, but I do have a few questions for you. So you mentioned in your opening remarks that public money is sacred.

If confirmed, can you be impartial in terms of how you proceed knowing that public money is sacred? And if, say, the governor or administration or the legislature tells you otherwise, can you be fair in how you look at balancing the budget and coming up with proposals in your capacity?

Yeah. So, I mean, impartiality sounds like great in theory, but in practice, it's very difficult. But I what I pledge to do is conform myself to ethical standards that are set out by the department and by the legislature and conform to those standards.

Okay. My next question has to do with modernization. You touched up on the modernization of, in B&F. So we were recently given a presentation back in February in terms of modernization for ETS under DAGS. And a lot of their top eight projects, it was not included in the governor's proposal.

And those are critical projects, whether it's data centers or cloud and all that. So is that something that you would take a look at to see how we go forward in terms of modernizing our systems?

Yes. I mean, again, technology is not the solution to all of our problems, but a strategic implementation as such is important. And I think one of the things that we do owe the people of Hawaii is a productive and efficient government. And those IT projects, which we will consider, is part of that.

Okay. And then the other question that I have, and thank you, Chair, for allowing me to ask these questions. So I understand you have a background in economics. I think that's great when someone has a background in econ. But being B&F director is much more than being an economist.

It also requires you to look at operations, systems. So I'm pleased to hear that you hired a new HRO manager, but I'm just curious in terms of what that transition is from being sort of that state economist to now operations, being able to tell departments, yes, you can proceed, no, you cannot proceed.

And knowing it systematically. Because it's, as you know, as you being fluent in two languages, it's like another language and learning all that. So how can you adjust to that and and, you know, adhere to some of these challenges on the operational side?

Well, the nice thing about being an economist is you just get to say whatever you think. But when you manage...

Being elected.

Yeah. Yeah. Yeah. Exactly. And so now in these positions, you have to be a lot more shrewd and mindful of how you're doing it. And what, again, I go back to public money as sacred. Those are you operate with principles. Instead of, like, just economic analysis, I'm thinking about the people I manage.

I'm thinking about the people of Hawaii, and I think about the money that I do not, I want to be work with all of you to spend in the most efficient manner possible in a way that reflects our values at a cost effective way.

Thank you. Thank you, Chair.

Senator Kim.

Several questions. Aloha. Thank you for being here. Talking about money is sacred, and definitely, I feel that way. Growing up, we didn't have a lot. So what exactly in your department do you think that you guys can become more efficient and save money for the taxpayers?

Yeah. I mean, that's the that's the one of the stated explicit purposes of the Budget and Finance.

What are you doing as the... What have you seen since you've been there and where you we can become more efficient? Because we have a lot of money in the state, but we don't operate efficiently. And there's a lot of positions in the department that perhaps maybe we don't need, or there's a lot of vacant positions that's just sitting on the books. So.

So one of the first things I've learned is we don't, we don't throw good money after bad. And so one of the really important advantages of Budget and Finance is as well as we do these allocation requests, people have to come and say, oh, we sent your money this way. We've done this so far.

You know, in a lot of cases, or not a lot of cases, but in a good amount, not it's clearly not the majority. The money wasn't spent well, and they keep asking for the same money. And so one of the jobs of Budget and Finance is to say stop. This isn't working, and we have to find a new a better way of deploying these resources.

So where are examples of that? Do you have, you can tell us any examples that you...

I mean, every time we return something with returned without action, it's because in allocation request, it's because the proposal doesn't make sense, and it didn't show that they were using the state's financial resources prior to that.

B&F, you kinda oversee the funding for the different departments, is it?

Well, the funding for most of the departments comes from our, our revenues. Right? And so we for CIP, we do oversee the bond project, which finances near all of our CRP projects. Yes.

But do you guys talk about where you look at the efficiency of all the different departments? As B&F, these folks put the budget together. Right? And you approve what is being asked for by each department head. So do you guys look at the efficiencies?

So I, you know, one of the things that they do is you get these variance reports and you like, they every department puts forward, like, oh, we're going to raise the economy or we're gonna boost agriculture by 10% and things. And I just think that those are and you see the same metrics every single year.

I don't have a lot of faith in those metrics a lot. I think a lot of this comes down to, like, project by project, intervention by intervention. Frankly, B&F has a lot less say over that because a lot of those things are within the department. I've come to have a lot more respect for the legislative auditor.

Because they can take a project, unpack it, and prevent and provide us with, like, a summary of what's happening. B&F, frankly, does not have access to all that information and that manpower, and that's something I think we should, like, think about more is how do we incorporate the lessons? Because we spent a lot of money trying to learn as a state.

You see the, you see the vacancies and you see them ask for more positions. Do you folks say anything about, no, we shouldn't be giving you more positions?

So for the vacancy rates, most of the vacancy rates show up as lapses in our financial plan. Right? Unless you do use vacancy rates for operational expenses, which is a no no and something that we really if we find out about, we let the departments know.

But, you know, with the vacancy rates, they're already in our financial plan. Those are the savings are in our plan. I don't think when it comes to general operations, there's just, like, large pots of money sitting there not being deployed. Special funds, we can have a discussion about that. You know? I'm sure we will. But...

And what what do you mean by that though? Because in the governor's budget in brief, the actual lapsed amount in general funds in fiscal year 25 was 533 million. So that's contrary to what you just said.

So 533 million...

We're not, that we're effectively deploying money. But you have 500, you have half a billion dollars in lapses.

Okay. So I'm sorry. I misspoke. In that in that in that context, what I meant is we are, like, if the departments aren't effectively deploying money, we're recapturing that in our financial plan. So it's not, like, disappearing into the ether.

Right? We're capturing that, and we're saying, no. These are state resources. So if you you promise to spend something. And this again, this is part of what B&F does. B&F says, you know, if you have a project and it's going awry, you know, our analysts review it, and we're like, no.

We're not gonna release these allocation requests. And then they show up in the in the lapses and things like that. And then that lapses are available for you guys to decide on how to deploy them.

But every year, there's a lapse. Right? And so if that's happening, it's like the IRS says, if every year, you know, you get money back, then you gotta start paying estimated taxes because you're not doing it correctly. So, you know, do you do you apply the same formula sort of to these deposits?

So what you're asking me is, like, would it be more efficient for a government to have lower levels of lapse amounts? I mean, from a budgeting perspective where we want to have accurate budgeting, it does show us that, like, people aren't using what we budgeted, which is a little frustrating, and I think we could work on that. Yes.

I hope to look forward. I have several other questions. Can I continue? The estimates, the estimates for the medical exemptions, are those estimates still still accurate? This is why you use the tax?

Estimates for the medical, can you be a little bit more specific for that?

Yeah. There seems to be this debate between that these exemptions are costing the state more than the figures initially provided. And as head when you were head of the TRP, you provided these GE figures. So is that estimate still...

Oh, okay. So you're asking the exempt, GET exemption on services provided by... It's actually services provided by nonprofits, which in our case, most of our hospitals are structured as nonprofits, so we're doing that. That's a judgment call.

Right? If you were to apply the GET on most of our health care costs in hospitals, I would imagine those prices would go up. That's something I would refer to you guys and our Department of Health and whether that's a wise decision or not.

Asking you whether the estimates are correct because you as the as the head of that you're in charge of that tax and whether or not your figures are...

Those figures are accurate. Right?

I don't know. I'm asking you. There's this argument or there's this...

No. So, like, if if the state of Hawaii and, again, this is about...

Costing the state more than what you estimated.

Well, now those figures are several years old, so it's the state it would be costing more because of inflation.

As far as the conveyance tax, how much is the state collecting on that?

Now you're asking me about, like I wish I had...

Let me just go back real quick to her the earlier question on the nonprofit organization. So is that accurate that in 2023, the exemptions claimed was 7.7 billion?

Yes. No. No. That's not the tax revenue. That's the on all exemption on all business activity. So you have to take that and multiply that by point four, and that is the assuming that all this is retail, that's the that's the tax amount. So it's probably, like, a couple 100 million.

Okay. Well, this is from DOTAX's report.

Yeah. Yeah. Yeah. But, like, what I'm saying is the 7.1 is that's a real number, but it's on all commercial activity. Right? So you gotta remember how our GET works. You take 4% on all the price of whatever. So you take 4% on the price. I think you just said 7.1 billion.

But going back to what Senator Kim was saying, you know, does this have to be more narrow, or should it be? Because that's quite a bit of money. And we're not really verifying, and we're not sure where we're... Is the exemption just for for just to have it? What are we trying to achieve? Does it need to be relooked at?

I mean, I think that's a great, that's a great activity for the Tax Research Commission.

Somebody could have said that. I asked.

Okay. So one more. The enterprise zone, the RETITC, these credits been analyzed, and do you see any, have you seen any of them that are underperforming?

So, again, the legislative auditor has a mandate to go through all of these tax credits and GET exemptions every single year. They started about six years ago, I think, and they've done, they do six or seven a year. I would have to go back and look. I don't think they've done the renewable energy credit tax credit yet, but we'll know. It's actually in statute of when they should look at that. And the what was the other question?

You were at DOTAX, and you were supposedly in the position that analyzed these tax credits. Right? So I'm asking you, did you see any that were underperforming? And if there are, then do you think we should eliminate it or reform it? Or...

Okay. So this goes back to, I will answer as an economist and less as the B&F director right now, which is...

I think your performance in the different areas that you serve relates to your position and all because you're in that decision making.

I haven't... Okay. So for the renewable energy tax credit, I haven't ever seen a study where we've looked at, like, what would actually... There there could be a study where you look at, like, what would happen to economic activity if we remove that?

Right? I will say this. There is different rationales for different tax credits. So for when we wanna support social needs, we assess it one way. For the renewable energy tax credit, one is, like, we wanted to create an industry. Right? And when they when the cost of technology was high, you one of the...

Well, my question is, did you see any tax credits that were underperforming? Whether or not it's good for the economy or not, have when you come across any that underperform?

You mean under like, when you say underperforming, do you mean underutilized or like not accomplishing what, what they set out to do? I mean, yeah, all the, like, agricultural tech credits that are, like, 1 million that don't, go unused. Like, there's a lot of tax credits out there that just never even got used for so that's the easy part. Yeah. Ship repair. Like exactly. So.

Should we get, should this legislature get that kind of analysis from the department to say these are underperforming? Perhaps we need to reform it. Perhaps we need to eliminate it. Do we get that?

I believe the best it it would be either the legislative auditor or Department of Tax is much more positioned to do that than Budget and Finance.

But I'm asking you when you were there.

Oh, okay. Yeah. I mean, we, I'm a, us researchers, we love little projects like this. So, yes, give it to us.

You're missing my point. You were in the position to make those determinations. Did you make it, and did you then bring it forward? I mean, I'm trying to sense whether or not you are able to do that when you're in B&F. You're just gonna be a pencil pusher and, I don't know, have these projects there.

So the question, I think the question kinda relates to where you stand depends on where you sit. And in the when I was the tax research and planning officer, my job was to be an impartial analyst of those tax things. So I would never take a view, and I believe I served the legislature better when I never took a view on different pieces of legislation.

I provide you with a revenue estimate. Right? My job now as budget director, I decide when to make those calls. Right? So it's a slightly different thing. I don't, when we go back and look at these particular tax credits, I don't recall. I would have to go back and study them before I made a a budgetary call about that.

Thank you.

Senator DeCoite.

Well, just wanna follow-up. As you as you say, be an impartial analyst, but at the same time as an economist, you I can quote you. You say whatever you think, which kinda get me worried about you being a B&F director. So I wanna go to the film industry.

What's your thoughts when we talk about the film industry? Because as the economist, I think one of my bigger questions was, what is the value behind a film, its marketing power to the state of Hawaii?

Yeah. So I'll approach that question in a number of different ways. One is a tax credit is like, we should never think of credits as, like, binary, like zero to one. Right? Because the first dollar that we use to support an industry or a tax credit usually goes a long way.

But, like, the last dollar that we put in, we may be getting less out. So one of the important things that we need to do as a state is realize where we are in that spectrum and then make the judgement call of where we are. I think with the tax film credit in particular, there's a worry that there's a race to the bottom.

Okay. No. I get that part. I think my question to you is, what is the value behind the film industry? And I'll just say take a film that runs on prime time. So now there's if I had to match the tax credit to what I would pay to run prime time advertisement from six to seven or seven to eight, what is the value behind that if you are that economist or an analyst?

Yeah. Well, so the way I would study that is I would consult with HTA and other marketers to look at, like, the amount of money that was being spent on that.

So you mean in all this time and, like, and I'm not just gonna pick on you because UHERO didn't do didn't do the same thing you didn't do either was to give me what is the value behind if I had to spend cash money to run advertisement for the state of Hawaii under the tourism industry. Let me tell you what the value was when we finally figured out.

It was a $100 million. That would run on and on. Which just blew me away because if I'm running a tax credit and I getting and I'm matching up against cash, I would literally be investing a $100 million in what I would be marking all across the world, and I'll take Five-0 for example. I think that's alarming. So my next question is, would it be better for us to use a tax credit or kinda go out of the circle and and offer up on grant to the film industry?

Yeah. So, generally, like, when you're looking providing a subsidy from the state, which is what we're doing, you wanna provide a subsidy for that exact behavior that you want to see. So if you are most interested in marketing, tailoring the tax credit, so it is about like, you're kind of you're indifferent to other aspects of the film production business, but you really want high levels of marketing behavior, I would structure it that way. You're absolutely right. Like, that's a really good...

Structure it in me or the body saying, okay. We should put one grant behind it. Paperwork easier to do versus the tax credit?

I would not be feel, I'd never administered the tax credit, so I don't feel comfortable answering that question.

So sorry, Chair. So, of course, I'm sure his head is gonna swell up right now because I believe he said, you get more respect for the legislative auditor right now. But the reason why I asked you that

I don't know how much more that can get.

Like just. But on on another note, so if your boss had overspend on the budget or budget got inflated somehow, would you be, would you in your capacity would say, hey. I think we're just spending way too much on this spectrum. We need to cut back on certain areas of your proposed budget.

I mean, I don't I can't see a scenario where that would happen because I work hand in hand with the governor's office to make sure we conform with the budgetary processes that we have put in place as a state. And we need a balanced financial plan. The governor needs it. The legislature needs it. Everybody needs it. So we'll never be, if we follow the processes that serve the state as well as it has, we should never be in that position.

Yeah. But I beg to differ because I think, like everybody else, I might think, yeah, I think agriculture needs more money here versus education, and I think they both work hand in hand. At some point, I need to know when you just literally will say, yeah, I think you just, like, spending way too much money. I mean, do you believe you have the, I guess, balls to say, come on. That's too much money you're spending in that area, and we should cut this back.

Well, I mean...

You can just tell me yes or no.

My job is like It's...

Yes or no.

Yes or no. I mean I will answer as a... I will answer as a Budget and Finance director, which is as a custodian of state financial resources, I will present those opinions to the governor, and we'll say, this is unsustainable. And that's my job to provide the that information to the governor, and then he can make a decision.

Thank you. Thank you, Chair.

Senator Hashimoto.

Thanks for being here. You know, I think you did highlight in your opening statement and also on your resume that you, you know, did your largest bond sale for the state at 1.5 billion. So were these taxable bonds or nontaxable bonds?

These were taxable bonds.

And why were they taxable bonds?

Well, the state has a large or state has a history of selling taxable bonds. One of the reasons that we do don't have at least a larger portion of that in nontaxable bonds is we're... What's that?

Isn't it the opposite? And only when we found out the IRS had concerns about private activity on state facilities that were for nontaxable bonds that we had to start moving toward taxable bonds, but the department did not differentiate between which CIP project we were leasing out and which ones we weren't. The history was actually the opposite until recently.

Yeah. I'm sorry. I miscommunicated. I was just saying I will have to double check, but I think we always assure some taxable bonds. But, like, the majority were nontaxable. And one of the things that we have done is because of our budgeting process and because of we lost the ability to classify as nontaxable, so provide an auditing trail to the IRS when they have questions.

I'm really glad you asked that question because one of my goals as, you know, director, especially if I get the job for or moving in the right direction, is I wanna work hand in hand with the legislature to find ways to, like, tailor, modify our budgeting process, but also develop the capacity internally so we can issue more taxable nontaxable bonds, which have a lower finance interest rate.

So what is the interest rate spread that we were looking at here?

Okay. So for taxable or for nontaxable? Between the two?

1%, 2%?

It's... I should ask my financial...

Well, if you're gonna make this your...

Yeah. Yeah. Yeah. It's around 1%.

Know what the the spread is.

I would just say around 1%.

Are you sure?

The spread? Between taxable and nontaxable.

Maybe you should go check. So let's assume it's 1%. That's how much? How much is that costing us per year?

Okay. So a 100 basis points on, and it depends. Like, let's assume, which it's not, that all of our outstanding debt is eligible to be nontaxable.

Fine. Just saying hypothetical.

So we have 12 billion. I think we have 10 billion.

Sale you just did. You said over 2 billion.

Oh, well, this particular bond sale. But like, what our goal is to, like... If we just refinance it that

What's the difference with that specific bond sale?

It's $20 million.

Right. $20 million. Does not, does not that concern you? Every year, we're paying $20 million extra. So what is the process that we have to go through to to to float the non taxable bonds and why isn't that your top priority? You said that public money is sacred.

But yet if we don't fix this, we're going to be issuing and paying $20 million extra per year. That's that's granted it's 1%. I assume it's higher. It could be up to 2%. But what what is your plan to make sure that this is gets fixed? Because I would say I would start with that.

I can save you $20 million a year if you if we fix this system. And why I'm questioning it is because you said it's we have to fix our budgeting system. I think, to me, what we have to fix is our bond tracking system. And so I'm not sure where the disconnect is there.

Well, one is our bond tracking system is part of our BMS system.

Is it the correct system that we're upgrading to? Because we have to pull the plug on the last one.

Yes.

So are you sure that we have the correct system that we have to...

We were going to apply. So I've already, were, I've already talked to the leadership of this committee about and said, one of my the things I am very interested in, I am, frankly, I'll use this term, a little ashamed that we don't have not the capacity to issue nontaxable debt. Right?

Well, how many years has this been going on? I know you're new, but shouldn't this alarm bells be going off that this is something we absolutely have to fix as soon as possible to save $20 million a year?

I can only answer for myself. And yes, it's something I'll...

What's our timeline in getting that done?

Probably two or three years.

So we're gonna we're gonna have to keep spending $20 million extra every single year until we figure this out. Can't we speed that up?

Okay. So one of the things that why it's gonna take a while is we need to adjust our budgeting practices here in collaboration with the leg. So the reason why I was giving a two to three year timeline is because you guys, we actually need to, like, put allocations and things and work with you to do that slightly differently.

We're in the process. We are developing organizational capacity in my department to do so, which I'll be perfectly honest. Things just it's very difficult to stand up new branches and things in two or three months. And I don't wanna...

And that's fine. But I think, you know, what worries me is we have to pull the plug on the last upgrade. And if that was not successful, I think we need to really understand in this committee that if you're up to the task to take us through the complicated process of upgrading and modernizing our tech, you know, our budgeting system to make sure that it actually happens.

Because we can't pull the plug again and then we have to wait another two to three years. Right? And so, you know, I think, yes. Great. You understand the economics. But I think at a certain point, we have to have an executor, right, in B&F, and we ought to make sure that you are the guy that can lead us through that.

Well, I'll tell you what. If we're having the same exact exact conversation in nine months, you can hold me accountable to it.

Well, I hope you can figure out what it where the deliverables in the next nine months of what what we can see the progress of of it happening.

Yep.

So maybe you can go back and think about that. Because I think my thing is is why do we have to go do the whole 1.5 billion? Couldn't we do smaller tranches and wait until we to know that, okay, we do we're gonna do a small tranche because we can get to nontaxable at some point. But to do the biggest bond sale, I don't know if you just needed it so badly with...

Yeah, we needed it because we had... We issue debt when we need it. We never wanna issue debt before we were, like, going to deploy it because that cost taxpayers more money because more it's just sitting. We're paying interest while it's sitting in our account. So the reason why we this was the largest is because we hadn't done a bond sale in a I think a year and a half.

But I think we didn't do it because we were, in theory, we're supposed to fix the problem. Right?

No. The nontaxable and taxable are two different issues. So when we issue for taxable and also when we're when we will have the capacity to issue nontaxable debt is are two different distinct issues, and I'm working on both of them.

When did you start?

Working on what?

On this issue.

On this issue? Well, we're developing a bond tracking system that's part of the IT. And then, again, as I reference organizational capacity, I'm like, I need to hire senior managers, and they're going to hire the CIP branch manager.

Because what I think I'm hearing is that we went off for 2 billion, but could we at least differentiate it between some projects knowing that we could've went taxable on some and...

Well, right now, we don't have the capacity to just issue any nontaxable debt.

Even though you started. So did you... I'm just trying to figure out when did you start, and how you're gonna finish.

When did I start working on this project? I mean, several weeks after I started as acting director. I would say a couple years to, like, really get this up and launched and work. Because I have to work directly with you guys. You have to there's no more block allotments. Right? We have to be a lot more specific, and I wanna get all of our ducks in order because when you're issuing...

Yeah. But if there are there interim measures that could take place? For instance, maybe on our side, when we look at the CIP budget, we can we differentiate this project. We know there's not gonna be commercial activity.

I mean, like I said, I am all for saving the state taxpayers' money.

Long term. But what's the short term plan that we could be a part of to find this solution?

You know, I'm happy to sit down with our staff and with you guys to think about a short term, see if there's any short term hurdles that we can do in the interim.

Senator Richards.

Yeah. Thank you. Thank you, Chair. You started out your comments saying that important part of your job, your oversight perhaps, is a dynamic economy. And you as an economist, I couldn't agree with you more. But we also have a reputation of having a business unfriendly environment here. So I couldn't agree with the concept that if we have a real dynamic economy, we're gonna solve a lot of our financial concerns.

I've long believed that the revenues that we generate from leases, etcetera, for our lands, etcetera, we'd almost not worry about collecting those if we had the economy driving and those lands were producing the revenue. That being said, so how do we change it? How do we fix it? How do we make it more business friendly and get that dynamic economy that we keep talking about? Real quick answer.

Yeah. I mean, I think one of the things that we're always really interested in doing is finding other engines of economic growth, right, other than military and tourism. I think that's very difficult when we have, I mean, we're habitually ranked as the worst business environment in the country. And that is it's not a one off. It's by number of metrics do that.

And so part of what we need to do is we need to find a way to support our entrepreneurs and our people that take risks. And when they do take risk, we should reward them, and they should be able to and we should support them and keep a large part of those rewards.

For small, you mean for small businesses?

Yeah. For small businesses. For entrepreneurs. Right? Like so, you know...

For lots of people, they may not be aware that the personal income and the business income are actually the same. And so...

And that plays a big role.

Like when you look at the House proposal, they're adding 1% additional. So all these small businesses, small farmers, doctors, dentists, they're all gonna get affected by that.

Right. You're absolutely right.

So top three things. What can we start working on to improve the business climate? Real easy questions you're getting today.

I mean, so I don't think anybody... We have, first of all, we have to conform to our values, and we have to decide what our values are. And then we should let other entrepreneurs flourish and businesses take risks and do well when it's not when it's in the alignment with our values.

So I don't think it like, anybody thinks it's great that it takes a $100,000 in two and a half years to remodel your kitchen. Right? So that's a really easy one. Allowing more, like, businesses and to to build, right, and give them freedom would be another good one.

I always say, like, we should figure out what we're gonna say no to because we need to say no to things. But once things we say yes to things, we don't go back on our word and change our minds. And we've done that a couple times with large businesses. That's two, I guess. So I owe you one more. And then, you know, you guys you guys panned it.

But I really thought this, like, whole idea of, like, putting a goal of having Hawaii being a more business friendly state. So, like, actually making commitment to lower ourselves in the matrix in the metrics. So we're, like, at least in the 25s. So we're not known as anti business friendly state. I think all of that requires time and study in, like, every year, but, like...

Well, the Tax Commission has a consultant.

Oh, good.

We can study that.

Okay. Thank you, Chair.

Yeah. I just wanna go back to the bonds and the defeasement bill that we had that you're gonna work on. What are some of the kinds of procedures that you would put in place to be able to do that so we can convert?

Because the defeasement bill is for existing buildings.

Existing buildings. Right? So the...

You know, we're talking about moving forward on the taxable bonds. But we still gotta fix all the buildings that we are currently on nontaxable bonds that we can go over to taxable bonds. And it has to be very deliberate, precise.

And so okay. So we're getting technical here, guys. So the with the defeasement bill, the issue with these this particular project so say, like, there's something in...

A cafeteria.

Okay. Cafeteria. Right?

High school cafeteria. They wanna lease it out to somebody. Now they're having a difficult time. DOE losing millions of dollars in revenue because they cannot now lease the cafeteria.

Okay. So the issue with that is you you take the cafeteria like, you tell us the school. Right? And we're like, okay. We're gonna trace this to all the things. The problem is that cafeteria has been financed by multiple bonds. Right? So it's more than the cost of the project.

And then each bond is financing a lot of other nontaxable issues. So we can look at this, but our analysis is, like, if we were to defease these bonds, you know, and I'm just spitting out numbers here, like, that we would have to verify.

But, like, if we're gonna if a project cost $10 million and we wanted to defease that, it could take $250 million because, one, we have to defease every single other project in multiple bond series. But we're happy to look at that, and we we've consulted the AG. And if that's something a priority, we can work with you directly.

Well, there's trade offs. Right? Because if you don't pay for it, even though there's some cost, you don't make revenue. They can't lease the space.

Right. And so I would just encourage us to do that. At least we can do that analysis so we can decide if that's viable for the state or not.

Did you provide testimony on the House proposal of the taxes, SB 3125?

Yes. We provide a proposal on all the tax bills.

No, in your testimony. Because going back to Senator Richards' question about small business because their proposal has the 1%.

What I propose in our or the B&Fs thing is we really need a balanced financial plan and to guard to the creditworthiness of the state.

Yeah. But that's going, if you're gonna be consistent with what he's asking and you believe that that 1% is not good for small business, why didn't you say that?

Because I've been told not to say as much things as I as an analyst normally say.

I said you told Senator DeCoite that you say what you think.

I say what my, the my responsibilities to the... I take my responsibilities to the Hawaii taxpayers seriously. And...

Why didn't you testify? Going back to what he asked and you believe that that to be true, why wasn't that not part of your testimony?

When I testify, I believe that there can only be one or two main points that you guys will listen to. And the most important point that I wanted to communicate is that we need a balanced financial plan.

But you also mentioned that one of your priorities is that Hawaii should become a business friendly state.

And I'm happy to work with you guys on like...

So why did you not include that in your testimony? Because you have two different... They're not they're not necessarily mutually exclusive.

I think there's a number of ways to achieve economic growth. I if you're if the requirement is to provide a an exhaustive analysis in every single testimony, that's not the job. I don't think that's the

That's what I'm asking. Yeah. You don't have to do a whole analysis on it. You know, you already said it publicly In this committee. I'm not sure why you wouldn't just put add a sentence in your testimony saying that.

role of

You've already made it public that that's your thought.

Okay. I'll take that into advisement.

I mean, how is it so does that mean we look at what you write differently than what you say? No. They co coincide. Any other questions?

So as budget director, how much latitude do you have in terms of saying what you think is right?

You know, one of the important things I believe I have a large latitude in saying what is right. I also think that, like, I'm part of a team, and I work for the governor. And when the governor says this is the direction we wanna do, his it's his job to handle disputes and disagreements and and take responsibility, and then I get on board.

And that's how I think I've approached all of my when I work for different I've worked for seven many different directors, and I've always offered my response. But once they ask me to do something, I do do it for them because they're the ones that are ultimately responsible.

You just go one step into the weeds in terms of releasing funds. How does that process work, or how do you see it working in the time that you've been in that seat? How how do you analyze the the request coming in for release from the departments? Because that takes a long time or has taken a long time.

Yeah. So, again, I think one of the I I mentioned it before. One of the primary roles that we do is ensuring that we don't throw good money after bad. So there is a really important role that BNF provides in in, like, reviewing projects and allotment requests and ensuring that the money is spent wise. And we do catch things that are problematic.

And then when they are problematic, I let the you know, the different people who are involved, the stakeholders are involved, why it is, and, like, our concerns. And I do believe that changes behavior. Right?

So when the appropriation is requested and and the governor sends his budget to us, there is a review already

of the project.

Correct.

So when it comes back to you now after the legislature say approves that Then there's a time lag again when you review again what was originally approved. So tell me again what the process is where you have to have another review of the review.

Yeah. So, generally, with, like, especially the first quarter of allotments and and things, we try to get that out the door as quickly as possible, and we understand things. But as the year progresses and we have a better understanding, particularly of CIP money that is available over multiple years, we do spend more time analyzing that, asking questions. If the you know, if departments send us junk information, that's that tells us something. Right?

And so we're just asking for That's

how we feel.

Yeah. So that tells us something about the way that they're managing their project. And we're asking that they send accurate information, and they can answer a question we're not being overly burdensome. And then when things do there are large delays. I wanna know about it because it's not our job to get in the way, slow down money.

It's our job to make sure the money spent being spent wisely.

So in the name of efficiency, do you work with the departments ahead of time so they know how not to give us junk information and give us information or give you information so that you can make an accurate assessment so that it helps us streamline the process as well, appropriations.

Yeah. I do. And I believe that this budget management system where it will be centralized, I think like, our hope is this will speed up the process. And, like, right now, we're always pointing direct it's always being enough salt that something hasn't been approved, but that's not always the case. Sometimes it's our our fault, and we take responsibility for that.

But, like, having a transparent system where people know where the decision points are, I think, will help our system, and that's one of the goals I have.

Is that gonna be But nothing

Okay. So we are we're planning to have the IT system installed by the end of the year, but we will miss this budgeting cycle. Right? Because the budgeting cycle begins around April. So we're really not until the following year when people the product will be fully deployed.

Okay. So, you know, I'll just go over, and you can disagree with me if you think that they're not factually correct. But the rainy day fund is at about almost 1,600,000,000.

Correct.

The carryover balance in the in the for 2025 was 2,120,000,000 according to budget in brief. Yep. The general fund lapses were 533,100,000. So what I don't understand is we're putting a pause on some of the tax breaks when we have all this cash, and we did not even look at us that many cuts in departments. But earlier, you know, your whole thing is we have to make it affordable.

We have to help businesses. But yet we I don't feel like we've actually done we're putting tax breaks on pause. We have all this cash, and it doesn't seem to reconcile.

Okay. So let me just just disaggregate these these cash these different balances. One is the rainy day fund is really for one off events. Right? So a recession, COVID, something that we didn't expect. And

Well, even if you take the take take that off the table. Right?

But Even if you

take that off. Because if you have if you're talking about Kona law

mhmm

instance, and we wanted to borrow from the rainy day, why wouldn't we do that versus raising taxes first? So I'm just saying that we have tools and monies available before we start raising taxes.

So we the big issue is around fiscal year twenty twenty nine. So if you look at the our carryover balances, they go we're using them as we should, right, to get through this thing, but we have a structural mismatch between the amount of money that we're bringing in and the amount of money that

we're Yeah. We're over spending. Yeah. Then why aren't you looking at cuts? Well you go into the departments and say, what can you cut?

Well, we're taking this very seriously. So we put a temper like, we took the 5% contingency restrictions and also the soft restrictions. So I never wanna convey to you that we're doing this lightly. Like, we've looked at You don't

have to. Your budget shows us that you haven't made that many cuts in departments. You have you we have about, what, 200 where is it? Okay. So all vacant positions, that's about 6,200.

Budget salaries for vacant positions, 340,000,000. We have over 200 special and revolving fund accounts. We have unencumbered cash balances over 660,000,000. So I'm just not quite sure why we're doing the tax pause when we have all this this cash.

Well, all those are one offs. Like, if we start spending it, like, they're, like, one off pockets of money. Right?

So if we adding them together.

Yeah. But, like, if we started spending those, then we wait five years. We spend all that money, and we're just in the same position.

No. Because at that point, if the economy doesn't improve and raising taxes might be our last resort, but why go to the taxpayer first versus doing the due diligence to make sure that we tighten our bill first?

Well, the answer really is the council on revenue. Right? Because the council on revenues lowered their forecast by $3,500,000,000, and we are mandated to respond to that. We have a reserve policy that we need to meet, and then we're doing that by law. So that's really what

didn't even make any cuts. Well, again I get what you're saying, but then you didn't do the hard work to cut anything. You didn't take any of the special fund balances that you could switch over to the general fund and still leave them enough money so that they could operate.

Yeah. I think that's a that's a valid critique and something we'll we are happy to work with you on.

Okay. Well, you saw our position. I mean, we're not hiding it. Right? When you saw the Senate bill, you saw our budget.

We're happy to work with you guys on where you think it the cuts, may be may need to be reduced, but we we didn't see any of that in the budget. Yep. So you're supportive of us trimming our belt?

I'm supportive of efficient government in a way that conforms with our values as a state.

Well, efficient government means no wasteful spending, no holding on to cash that we don't need.

Efficient government means reducing the amount of wasteful spending in a way that's coherent. And so one of the things that I

Spending for good cause is spending for good cause. We should have no wasteful spending, not just reducing it. We shouldn't have wasteful spending.

Well, a lot of the spending that we do is is represents different people's values. Right? And so what's efficiency to what

You have cash balances. You have vacant positions. You're not spending it.

But, again, those are those are included in our financial plan for you so we can balance those things. And so if we But at the same time, what we're

trying to

do the if you cut vacancies, right, they're just not gonna show up in the lapses. It doesn't save us a lot of money in terms of balancing the financial plan, and that's what we're concerned about. Right? And so one of the worst things How

do you have you're collecting money just to lapse?

No. We're budgeting money. Just we're budgeting money.

Point to the general fund. So that means you're just raising taxes just so that you can have a lapse amount.

But the we've raised the lapse amount to represent the like, a realistic assumption about that going forward. Right?

But we shouldn't be collecting money we're not spending. We should be yes. And this is one of the highest lapse amounts we've ever had.

Last year. But we can't count on that. We don't believe that that's going to be the norm going forward. Right? Our based on our calculations, which is the average of five years going back, which we think is the safer way to do it.

We need

to budget

review of all the special funds to say, you know what? They don't need that much in there. They're not spending it. We should move that to the general fund. What kind of review did you do of all these different special funds with unencumbered balances?

We've done a review, and we shared those reviews.

You're asking what you did and incorporate them into your budget?

The it was $23,000,000, which is the amount that we found that was available. Right? That's not gonna change the needle in terms of our financial plan.

No. So you you we what the Senate did was it looked at three years of operational years Yeah. And then took the rest of the swept it to the general fine. That's not what you did.

No. Oh, okay. So some of the lapses that you do, like the Senate proposed, would endanger the public, like, would make it impossible for us.

We left three years worth of upgrading funds.

For well, for servicing our public I I speak mostly for my department because that's the one that I was worried about.

No. I'm just but you you you should be looking at the public. Reviewing them.

Yep.

You should be looking at all the unencumbered cash balances. You should be looking at all these vacancies. At least some of the departments are telling us, you can take the cash, leave the position because it's so difficult to reestablish with DHIRD when we ask for it back. So just leave us just leave the position. So we've actually worked with a number of departments that worked with us to say, instead of those cuts, can you take these cuts?

So they've offered that. So but what I but it didn't get to the point where you were able to to have that same conversation.

Oh, yeah.

Okay. Well, as we develop the next year's budget, those are things that I really appreciate the you pointing the

out there. Willing to to cut. They came. They showed us the those cuts, very difficult, but we can give you these you can cut from here instead. K.

About three or four departments. How many came to us? About three or four. The rest were told not to do that. So they didn't come.

So I don't know how that's working together. If you're gonna if someone's selling the departments, don't work with them to find the cuts that would work for you. So hopefully, you can go back to those departments and say, can you work with the legislature and like, some of the other departments did so that we can we they can do strategic cuts that are not gonna impact services. Yep. Sure.

Just one I have one follow-up I thought of. Do you have any ideas on any revenue proposals? Because my understanding is I don't think this administration had any revenue proposals.

Well, the the pause in our tax plan would raise 700 $650,000,000.

I I

understand that. But I'm what I what I'm getting at is new creative revenue type of proposals.

Yeah. Again, that's like it's not gonna be solved by Wednesday.

No. No. I understand that, but I'm I'm asking

presented the budget you had that should have all been part of your budget package.

I'm just asking if you have any thoughts on that. Because in this role, part of that responsibility is also coming up with revenue generating proposals. Right. Right?

And so it just in terms of, like, the weight of the words of the budget director and as the need to be an analyst, I need to study those things before I would make, like, make proposals of that nature.

Yep. So some of the authorities and corporations, for instance, they used to be on special funds. They were able to generate their own revenue. And over time, the the they've come into the legislature to ask to be on general funds. So now there's no impetus for them to go and Yep.

Create revenue on their own. So how are you approaching that? Because of it's too specifically, our HCDA and ADC, they were on special fund. Now they're on general fund. So I don't understand why they're telling us, oh, we can't go back to special fund.

Yet they have they're still generating revenue. So I don't know I'm not sure what they're doing with their special fund money when they used to be entirely on special fund.

Great questions. I I have not looked into those two specific issues in-depth, but I will. Okay.

Any other questions?

So with that said, chair, was that initiated by the administration or from us? The The c d a n.

No. The historically, they were on special funds.

K.

Yeah.

And who

And so so that we can preserve the tax breaks

We ended up trying to find where we can find money. Okay. Thank you. Okay. We have a number of people in in here testifying in support, and I'm sure they're just gonna stand on their written testimony.

k.

Okay. Corrections.

Hello. That's cool.

Thank you. Transportation in support. Energy office. I saw him earlier. Oh, okay.

Governor's office. And the support therapy. That means a lot. HCD eight.

Support.