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Mayor Kenoi vetos 2011-12 budget submitted by the County Council

Letter from the Office of the Mayor to the Hawaii County Council

June 15, 2011

Members of the Hawaii County Council
Hawaii County Building
25 Aupuni Street
Hilo, Hawaii 96720


Pursuant to Section 3- 12 of the Hawaii County Charter, I am disapproving Bill 29 ( Draft 4), the 2011- 2012 Operating Budget, and returning it to you.

Key Council Budget Amendments Are Apparently Illegal

While I appreciate the time and effort the County Council has invested in proposing amendments to the operating budget, these amendments do not meet the requirements of the County of Hawaii Charter or the County Code. I have no choice but to veto Bill 29 ( Draft 4) as amended by the Hawaii County Council.

Corporation Counsel has issued a legal analysis to County Director of Finance Nancy Crawford that found “numerous legal infirmities… that compromise the integrity of this bill.”

This review concluded some of the most important Council budget amendments are apparently illegal because they violate the separation of powers requirements of the Hawaii County Charter.

The Corporation Counsel analysis also found that a separate Council amendment violates the ordinance that governs the Public Access, Open Space and Natural Resources Preservation Fund PONC).

Yet another Council amendment involves unacceptable financial risks because it proposes to immediately spend millions of dollars in county funds that should be held in reserve to prepare for uncertainties this year and in the years ahead.

These legal and other defects in the council’s budget amendments could have been avoided. It is my sincere hope that my administration and the Hawaii County Council will be able to work together on the budget in a more collaborative partnership in the future.

Council Actions Violate Separation of Powers

The council’ s amendments to Bill 29 would increase overall county spending beyond what our administration proposed, and would shift some spending within the budget.

To accomplish this, the council amended the budget to include a fabricated “Council Adjusted Expense Account” that appears to be unprecedented in Hawaii government history, and represents the most serious of the defects in the council budget amendments.

The Hawaii County Council has the power to reduce specific appropriations, which is the proper way for the council to cut spending. However, this Council declined to do so. Instead, the Council attempted to use this fabricated “Council Adjusted Expense Account” to press our administration to make cuts that the council was apparently unwilling or unable to make.

Corporation Counsel on June 14, 2011 issued a legal analysis advising County Director of Finance Nancy Crawford that this Council use of the “Council Adjusted Expense Account” is in effect a violation of the separation of powers mandated in Article III of the Hawaii County Charter.

Council Action on PONC Apparently Violates County Code

An additional council amendment to Bill 29 proposes to cut funding for the Public Access, Open Space and Natural Resources Preservation Fund ( PONC) by$ 1 million. This Council amendment would reduce funding for the PONC from 2 percent of county tax collections to about 1. 5 percent of projected property tax collections for fiscal year 2012.

However, Hawaii County Code Chapter 2, Article 42, clearly requires that 2 percent of county tax collections must be deposited into the PONC fund annually. Corporation Counsel therefore advises Finance Director Crawford that this council budget amendment appears to violate the County Code.

Council Refuses to Increase Budget Reserves

A third critical flaw involves the council budget amendment to divert funding away from the county’s Budget Stabilization Fund. We recently witnessed dire events overseas with impacts that rippled out to affect our local economy, ranging from the Great Recession of 2007- 2009 to the tragic March 11, 2011 tsunami that devastated parts of Japan.

Those events dramatized the need for a budget reserve fund to stabilize county finances during challenging economic periods. With those risks in mind, our administration’s budget set aside $2.8 million in anticipated labor savings from collective bargaining to build up the county’ s budget reserves.

The council disregarded that proposal, and instead amended the budget to spend the entire $2.8 million immediately, saving none of those funds for later. This is unwise because it fails to set aside additional reserves for what may be challenging times ahead. It is also risky, because this $2.8 million the council proposes to spend may not materialize.

Depending on the outcome of statewide collective bargaining later this year, the labor savings could be smaller than we have projected. That is one important reason we urged the council to be cautious, and to place these funds in a reserve fund for the future. Unfortunately, the council refused.

Unequal Treatment

The council also adopted an amendment that inexplicably favors some county residents over others by offering subsidized golf play in East Hawaii, but not in West Hawaii. We are one community, and I insisted from the very beginning of my administration that all residents of our island be treated equitably. The council has offered no justification for this budget amendment.


Most of the council’s budget amendments this year were designed to redirect funds to make a partial payment against future health care obligations for retirees known as the General Accounting Standards Board Statement No. 45 payment.

Also known as GASB 45, this is a voluntary payment against a future obligation, and has been compared to pre-paying a mortgage. The State of Hawaii has made no GASB payments, and the City & County of Honolulu is deferring its GASB payment for this year. The County of Hawaii, meanwhile, has made these payments for four straight years.

Representatives of Bank of America Merrill Lynch, which has served as an underwriter for Hawaii County bonds, confirm that many Mainland municipalities are forgoing the GASB 45 payments because of the difficult economic times. Those representatives stress that maintaining adequate financial reserves should be the county’s focus at this time.

We can and should defer the GASB payment until county finances improve. Our priority today is to build up the county’s cash reserves, protect the county’s bond rating, and prepare for the uncertain times ahead.

Our administration submitted a balanced budget that is $35.9 million less than the budget in effect when I took office. Our goal was to reduce county spending for a third consecutive year while maintaining essential police, fire and civil defense protection, and also preserving programs and services for our children and elderly. We met our goal while also protecting funding for non-profit service organizations.

I am proud of the careful, difficult work done by our administration, and by our departments. They have done an excellent job of completing projects and delivering services in a very challenging economic period, and did so while reducing the size and cost of county government. Our administration budget is a reflection of their hard work and careful planning for the future.

I thank the County Council for its proposals and amendments, and I regret that those amendments do not meet the requirements of the County of Hawaii Charter or the County Code. Those shortcomings leave me no choice but to disapprove Bill 29 ( Draft 4) and return it to council. Mahalo for your efforts, and for your understanding.

William P. Kenoi

Letter from Hawaii County Corporation Counsel Lincoln Ashida.

PDF letter from Corporation Council regarding 2012 Budget

Text of the letter from Corporation Counsel Lincoln Ashida:

The Operating Budget for the County of Hawaii for Fiscal Year 2011- 2012

We are forwarding Bill 29 ( Draft 4) to the Office of the Mayor without our approval as to form and/or legality.

After careful review of the bill as submitted by the Hawaii County Council, a review of the Charter of the County of Hawaii (as amended 2010), are view of previous opinions of the Office of the Corporation Counsel, and a review of prevailing case law and precedent, there are numerous legal infirmities with respect to actions taken by the Council (and actions not taken by the Council) that compromise the integrity of this bill.

For this reason, we are unable to approve the bill as to form and/or legality, and cannot recommend Bill 29 ( Draft 4) become law as presently submitted.

Hawaii County Charter

Article IV, Section 4- 1 of the County Charter of the County of Hawaii (2010 Edition) (hereinafter “Charter”) vests the executive powers of the county in,and authorizes exercise of those powers ” by the executive branch, which shall be headed by the mayor, and administered by the managing director, except as otherwise provided by this charter.

More specifically, Article V, Section 5- 1. 3 of the Charter provides that “the mayor shall be the chief executive officer of the county vested with all the executive powers of the county, except as otherwise provided by this charter.”

By contrast, Article III, Section 3- 1 of the Charter provides that the ” legislative powers of the county shall be vested in the county council. Its primary function shall be legislation and public policy formulation, as distinct and separate from the executive administration of county government.”

With respect to authorized Council action on the annual operating budget for the County, Article X, Section 10- 5 provides as follows:

Section 10-5. Operating Budget: Council Action. After the public hearing, and after the submission of the amendments to the operating budget and to the capital budget, the county council may adopt the operating budget as amended with or without further amendments.

First reading shall be after May 5. In amending, it may add new items or increase items in the operating budget. It may decrease or delete items, excepting appropriations required by law and appropriations for debt service. But in all cases the estimated revenues for the ensuing year shall be at least equal in amount to the proposed expenditures.

The council shall adopt the operating budget on or before June 30. If it fails to do so, the operating budget as submitted and as amended by the mayor shall be deemed adopted by the council as the operating budget for the ensuing fiscal year.

If the mayor disapproves of the bill adopting the operating budget or of any part thereof, the mayor shall return the bill or the portions vetoed with a written statement of objections to the clerk for further council action within ten calendar days of receipt of the bill.

The adopted operating budget shall be in effect on and after the first day of the fiscal year to which it applies.

Bill 29 (Draft 4)

1. The Council abdicated its responsibility under Section 10-5 of the Charter in fabricating a “Council Adjusted Expense Account”; and failed to make decreases in items as required by the Charter. Via Council action on May 18, 2011, Bill 29 was amended to create an account entitled “Council Adjusted Expense Account” and inserted a “negative appropriation” of $5.8 million.

The Council did not identify any items in the OCE accounts of any County department that would be reduced to offset this reduction, but instead said they would essentially “leave it to the administration to decide” or words to that effect, what to cut.

Instead of identifying those programs, personnel, services or expenses that would be reduced to balance expenditures against revenues, the Council instead abdicated the irresponsibility and essentially mandated the Mayor perform this task. In so creating this account and “passing” their budget, the Council has in effect violated the separation of powers and Article III of the Charter by directing the Mayor to take administrative action with respect to reductions in the operating budgets for the various County departments and agencies.

In Gallagher v. Regan, 55 A.D.2d 284, 390 N.Y.S.2d 703 (1976), the Fourth Department of the New York Supreme Court’s Appellate Division considered a challenge by the chief executive of Erie County against its legislature for making “lump sum” reductions in the budget submitted by the executive. The executive claimed that by not identifying specific line items to be reduced, the legislation action taken was invalid.

The court agreed with the executive and held as follows:

In reducing the mental health appropriations by $486, 000, the Legislature has departed from the requirements of an itemized budget without persuasive justification for its action. Though the funding complexities of the mental health programs make it difficult to predict the budgetary consequences of the elimination or reduction of a particular appropriation, the programs are listed individually as line items in the tentative budget and the Legislature should have responded in kind.

The legislative resolution fails to identify either the programs which should receive reduced appropriations or the amount of such reductions. Additionally, the reduction is to be accomplished by ‘economies in operation’ without mention of the nature and scope of such economies. While the legislative resolution concerning this question provides that if the economies are not realized the Legislature may then make line item reductions, such a procedure contravenes its statutory duty to make a determination upon consideration of the tentative budget.

The $ 1,240,000 legislative reduction of equipment, materials and supplies, and expense accounts is likewise invalid. This measure indiscriminately affects all county expenditures, except personnel costs, in every unit of county government. The Legislature has attempted to reduce the total appropriation and substitute a lump sum for these expenses in place of the itemizations contained in the budget. Such action is plainly unauthorized (Erie County Charter,s 1803) and the objection of the County Executive is valid.

Accordingly, the legislative reduction of the appropriations for the accounts designated for mental health programs and for equipment, materials and supplies, and expenses may not be reflected in the budget for fiscal year 1977.

Over the years, this office has consistently opined the doctrine of separation of powers must be strictly adhered to by both the administration and Council.

In a 1988 opinion from this office, numerous proposed amendments by the Council were deemed either violative of the Charter, Hawaii County Code, Hawaii State Constitution, or the doctrine of separation of powers, where the Council sought to direct “the administration to take certain action. In that opinion, we noted that “the municipal legislative body may not disregard Charter mandates or procedures at any time. An ordinance must conform to the express terms of the Charter.”

Opinions from 1980 and 1985 are in full accord with this long-standing, well-recognized and Constitutional principle.

Had the Council sought to properly pass amendments to reduce specific items in departmental OCE accounts as required by the Charter, there would be no separation of powers violation since it is wholly within the province and authority of the Council to make such amendments as contemplated in Section 10- 5 of the Charter by identifying these specific items.

Had the Council identified specific departments that would be impacted by OCE reductions, and specified the amount of the reductions, their action would be arguably defensible as minimally complying with the plain reading of our Charter.

However this did not happen. Instead, there is serious question as to the integrity of the budget “passed” by the Council, since the underlying amendment fabricating the Council Adjusted Expense Account” may be legally infirm as violative of the doctrine of separation of powers, as well as a plain reading of the requirements of our Charter.

2. The Council’s action in reducing the annual PONC contribution by$1 million without accompanying legislation renders the reduction invalid.

Via Council action on May 18, 2011, Bill 29 was amended by reducing the annual contribution of 2% of all real property tax revenues into the Public Access, Open Space and Natural Resources Preservation (hereinafter “PONC”) fund by $1 million.

However, there has been no consummated Council action to amend Chapter 2, Article 42 of the Hawaii County Code 1983(2005Ed.) (herein after “Code”) to reduce the legally mandated contribution of 2% by $1million.

Without appropriate Council action to amend the Code, contributions of less than 2%as required by law would be illegal. Unless and until Chapter 2, Article 42 of the Code is properly amended, the proposed reduction is illegal.

Further validating the illegality of the Council’s budget as submitted was the inexplicable inaction taken by the Council’s Committee on Finance on June 14, 2011. At this meeting, despite being specifically advised by the Deputy County Clerk that an amendment to Chapter 2, Article 42 of the Code was necessary, the Committee failed to pass Bill 61 by a vote of 3-6. The measure will proceed to the full Council on July 7, 2011 with a negative recommendation, well after the deadline for the enactment of the Council’s version of the budget, assuming there is a mayoral veto and subsequent successful veto override.

As presently submitted by the Council, their proposed budget would not enable the administration to meet its legal obligation to transfer adequate funds to the Open Space fund as currently required by law.

We ask you review the enclosed Bill 29 ( Draft 4) and assess the accounting implications of the bill. Our review was limited to a legal one based on what was submitted to the Mayor by the Council. We calculate mayoral action on Bill 29 (Draft 4) must occur on or before June 16, 2011, so your prompt attention to this matter is appreciated.

Very truly yours,
Corporation Counsel

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