TAXWatch: OHA’s LLCs – The Noose Is Tightening

Our Office of Hawaiian Affairs (OHA) formed some limited liability companies (LLCs) a while ago and dropped significant assets into them, including some 1,875 acres in Waimea Valleyon Oahu that were conveyed to Hi’ipaka LLC in 2007.  The LLCs’ governing documents all say that they are to be managed by individuals holding specified administrative positions at OHA, specifically the CEO, COO, and CFO.

Over time, however, it became increasingly evident that the LLCs were being run like fiefdoms accountable to no one.  The State Auditor’s Report No. 18-03brought to light concerns about spending irregularities, for example, including finding several occasions in which OHA’s CEO funded sponsorships contrary to Board-adopted guidelines and staff recommendations.

The Board of Trustees of OHA engaged the accounting firm CliftonLarsenAllen LLP (“CLA”) to conduct a forensic accounting examination “to identify and quantify potential areas of waste, abuse, and fraud … for OHA and its LLCs.”  As of November 30, 2018, however, a memo from one of the OHA trusteesobserved: “The LLCs have refused to provide any information to CLA.  OHA’s failure and the LLCs’ refusal to honor the Board’s will[,] have led to substantial and unwarranted delays. … It is now unclear whether CLA will be able to complete the audit at all.”  

Andrew Walden, publisher of Hawaii Free Press,submitted a request to turn over financial records and was told that the LLCs were independent entities to which public records laws didn’t apply.  In the resulting lawsuit, David Laeha, then OHA’s CFO and one of the managers of the LLCs, stated in court papers:  “As a matter of practice, the Managers restrict [OHA] access to the information of the [LLCs] so as to reserve managerial powers in the Managers, as contemplated in Respondents’ operating agreements.  Managers have explicitly limited OHA’s access to information, and reserved their right to continue to do so.”

But now the noose is closing around the LLCs from several different angles, threatening to end the fiefdom and the shroud of secrecy surrounding it.

On March 29, Circuit Judge Crabtree entered a Minute Orderin Walden’s case ruling that the LLCs cannot avoid the public records laws.  The final order hasn’t been entered yet, but the direction in which the judge is heading appears clear.

On April 12, the Senate adopted Senate Resolution 151, which urges OHA to complete the financial audit and management review of OHA and its subsidiaries.  A resolution with similar text is being considered by the House.

House Bill 172, being considered by a House-Senate conference committee, presently contains a budget proviso appropriating funds for the CLA audit and requiring the auditor to submit its report 20 days before the 2020 legislative session starts.

House Bill 402, also being considered by a conference committee, increases OHA’s funding, but only if the CLA audit is completed and copies of the audit report are provided to the Legislature.

The fiefdom must end.  We the People of Hawaii created OHA in the Hawaii Constitution and have specified that it be run by trustees elected by the people.  The lands and the vast sums of money that OHA controls (now in excess of $660 million) are assets belonging to the people of Hawaii.  Their use cannot be shielded from accountability (to both the Trustees and the general public) simply by tossing them into LLCs.  Those who have created or perpetuated this charade must be challenged.  The dealings of the LLCs must be disclosed.  If the audit discovers any misappropriation of those assets, appropriate remedial action must be taken.  Not only do the beneficiaries of OHA deserve this, all the people of Hawaii deserve this.

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