TAXWatch: The Special Land and Development Fund

In this week’s spotlight is the Special Land and Development Fund or SLDF, which is administered by the Department of Land and Natural Resources (DLNR).  Into that fund goes all land rents the State receives for land that is either leased or used under a revocable permit (such as those used by airport or harbor-based businesses).  

The fund is also fed by earmarks on two taxes.  HRS section 248-8 gives it 0.3% of the highway fuel tax up to $250,000, and HRS section 237D-6.5(b)(5) gives it $3 million of the transient accommodations tax, each year.

Recently, the State Auditor came out with Report No. 19-12concentrating on this fund.  The Auditor raised some questions about the way the fund and some of the underlying state lands were managed, and the Department of Land and Natural Resources (DLNR) took umbrage with quite a few of the Auditor’s findings.

Just to give you a flavor of the underlying mentality, the first page of DLNR’s response to the audit findings touted “the Land Division’s planning, implementing and accounting efforts [such that] the annual revenues for the SLDF increased exponentially from $6.3 million in 2010, to over $20 million in 2018.”

In response, the Auditor thought it interesting to use 2010 as the starting point because it was a tremendous drop from the prior three fiscal years, where revenues averaged $8.4 million.  Also, part of the increase was due to the $3 million from the TAT earmark, which took effect in 2016 (Act 117 of 2015), so how could DNLR’s Land Division take credit for that?

Also, there seemed to be some problems with basic math.  In 2018, DLNR told the Auditor that the SLDF consists of a parent account and 24 subaccounts.  That information was used to create Report No. 18-19.  This time, the Auditor pointed out that 23 subaccounts weren’t reported to the Legislature.  DLNR’s response was that the SLDF has only one subaccount, and that the 23 other subaccounts, which together contained over $1 million, were sent to other divisions within DLNR.

Huh?  Even if the 23 other subaccounts were being managed by different divisions within DLNR, the subaccounts are still under the SLDF as the parent account and are still within DLNR. 

Apparently, DLNR’s Land Division apparently has a “silo mentality” that is so strong that “we don’t manage it” means “it doesn’t exist.”  But the response to the Auditor isn’t supposed to be Land Division’s response, it’s DLNR’s response.  The response was on DLNR letterhead and signed by its chairperson, so why doesn’t it contain input from the other affected divisions?

Finally, let’s focus on another statistic the Auditor pointed out:  the delinquency rate on State lands rented out.  As of the end of June 2017, DLNR had $7.3 million in accounts receivable.  $2.1 million of that, or 29%, was more than 60 days unpaid.  Of the $2.1 million, DLNR determined that $1.6 million, or 75%, was uncollectible.

DLNR’s response:  “However, the Auditor’s report fails to cite to comparable delinquency rates from other State or County landlords … or the private sector.  Therefore, the Department believes this criticism lacks support and is unwarranted.”

Excuse me?  Rent is being charged for state lands (less than market rate in many instances), the rent isn’t being paid on time 70% of the time, and it will never be paid more than 20% of the time.  True, those statistics apply to just one point in time, but if you were the landlord and those statistics came from your property management company, wouldn’t you at least be asking questions?  Would you even care about “comparable delinquency rates”?  By the way, you’re a taxpayer so you ARE the landlord.

Stop shooting the messenger and concentrate on cleaning house!

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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.