STATE OF HAWAII
BOARD OF EDUCATION
FINANCE AND INFRASTRUCTURE COMMITTEE

MINUTES

Queen Liliuokalani Building
1390 Miller Street, Room 404
Honolulu, Hawaii 96813
Thursday, January 17, 2019

PRESENT:
Kenneth Uemura, Committee Chairperson
Bruce Voss, Esq., Committee Vice Chairperson
Nolan Kawano
Kili Namau‘u
Catherine Payne
Dwight Takeno
Patricia Bergin, Ex Officio

EXCUSED:
Brian De Lima, Esq.

ALSO PRESENT:
Christina Kishimoto, Superintendent
Amy Kunz, Assistant Superintendent and Chief Financial Officer, Office of Fiscal Services
Dann Carlson, Assistant Superintendent, Office of School Facilities and Support Services
Donna Lum Kagawa, Assistant Superintendent, Office of Curriculum and Instructional Design
John Chung, Public Works Manager, Project Management Section, Office of School Facilities and Support Services
Alison Kunishige, Executive Director
Kenyon Tam, Board Analyst
Regina Pascua, Board Private Secretary
Irina Dana, Secretary


I. Call to Order

The Finance and Infrastructure Committee (“Committee”) was called to order by Committee Chairperson Kenneth Uemura at 11:01 a.m.

II. *Public testimony on Finance and Infrastructure Committee (“Committee”) agenda items

Name
Organization
Agenda Item
Position
Arvid Youngquist PublicV.A. Committee Action on recommendation regarding selection of three public school land sites to lease pursuant to Act 155 (Hawaii Revised Statutes Section 302A-1151.1, Pilot program for lease of public school land)Comment

Arvid Youngquist, member of the public, testified on the selection of three public school land sites to lease pursuant to Act 155. Youngquist detailed a property in Niu Valley and asked why the Department of Education (“Department”) did not identify it as a potential Act 155 site.

Christina Kishimoto, Superintendent, stated that the Department could answer Youngquist’s questions if he provides written testimony for the Department to review.

Youngquist stated that he would like more background before the Committee provides its recommendation to the full Board of Education (“Board”) and commented on teacher housing considerations.
Written testimony was also received and provided to the Committee Members. The following is a listing of the people that submitted written testimony before the testimony deadline.

Name
Organization
Agenda Item
Position
Martha Guinan, Ivalee Sinclair Special Education Advisory Council IV.B. Update on the Department of Education’s briefing to the Hawaii State Legislature on the Department’s budget request for fiscal biennium years 2019-2021Support/Comment


III. Approval of Meeting Minutes of November 15, 2018

ACTION: Motion to approve the Finance and Infrastructure Committee Meeting minutes of November 15, 2018 and the Finance and Infrastructure Committee Meeting executive session minutes of November 15, 2018 (Voss/Takeno). The motion carried unanimously with all members present voting aye.


IV. Discussion Items

Amy Kunz, Assistant Superintendent and Chief Financial Officer, Office of Fiscal Services, reviewed the Department’s operating and capital improvement program (“CIP”) budget for fiscal biennium years 2019 through 2021, including executive branch decisions. Kunz stated that the Department reprogrammed $40 million of existing funds within the biennium base budget, and the Governor approved the Department’s reprogramming of existing funds in total. She noted that the Department did not include this attachment in its materials because the Governor approved all of the reprogramming, also known as trade-offs and transfers. Kunz reviewed the general funds operating budget requests and stated that for Fiscal Year (“FY”) 2020, the Department requested $28.6 million and the Governor approved $21.5 million. For FY 2021, the Department requested $31.3 million and the Governor approved $21.9 million. Kunz reviewed the total operating budget for all means of finance and noted that this information includes executive branch decisions and the adjusted budget for both years of the biennium.

Kunz reviewed CIP budget requests for fiscal biennium years 2019 through 2021, including Board and executive requests. She stated that executive requests are substantially lower than what the Department requested. The Governor also provided amounts in lump sums. Kunz noted that the Department’s materials include a detailed outline of the Department’s plans of how it would prioritize that level of funding and where it would place funding in each year of the biennium based on the executive lump sum distribution.

Committee Chairperson Uemura asked if the Committee should be concerned about anything. Kunz answered in the negative.

Kunz stated that the Board is able to initiate conversations with legislators regarding Board-approved requests and needs. She noted that the legislative budget process is changing, and the Department is unsure of what the affect will be. Kunz explained that subject matter committees would be reviewing budgets before the budgets move to the Senate Committee on Ways and Means (“WAM”) and the House Committee on Finance (“FIN”). Kunz stated that in the past, the Department worked with WAM and FIN directly and informed education committees on specific requests. She stated that the Department is unsure of how changes will work and further explained that the new process may include budget submissions through individual bills, instead of one budget bill.

Committee Chairperson Uemura asked if the new approach is better and commented that it appears to be a better approach due to the attention to details. Kunz stated that the Department is unsure as of yet which approach is better. She noted that this concept may jeopardize trade-offs and transfers and stated that the biggest risk is the $40 million that the Department prioritized within its base budget. Kunz stated that the Department is working to educate legislators and education committee members on the Department’s budget.

Christina Kishimoto, Superintendent, stated that in terms of trade-offs and transfers, the Department was asked to review its internal budget and reprioritize around the Board and Department Joint Strategic Plan (“Strategic Plan”). She stated that the Board has done so, but the Legislature may completely reopen the Department’s budget, which would change the process from what the Legislature initially asked the Department to do. Kishimoto noted that the Department is also concerned about the sufficiency of time in regards to the individual bill process. She stated that legislators are already on a tight time schedule to make decisions and noted that the Department is concerned whether there will be enough time for budget bills to go through subject matter experts and then for individual budget bills to reflect the budget.

Kunz stated that in the Department’s initial conversations, legislators are supportive of how the Department did trade-offs and transfers and are supportive of how the Department is making an effort to be more transparent in its expenditures of funds. She noted that the Legislature is also supportive of how the Department produced a smaller operating budget request than those it has in the past.

Committee Vice Chairperson Bruce Voss stated that legislators might express concerns that the reason the Department had money available for trade-offs and transfers is that it did not spend it. He asked what assurance the Department would give that it would be able to spend reprogrammed funds.

Kunz stated that the Department would be able to allow programs to start the year with a known budget rather than not knowing and assuming shortfalls. She noted that it takes time in the case of shortfalls for the Department to identify salary savings or adjustments to allocate to programs. Kunz stated that if the Department were able to provide the budget upfront going in to the year, programs would know what is available and plan accordingly. Kunz stated that the Department is working on planning and monitoring components and is reviewing expenditures and sharing information with Complex Area Superintendents (“CAS”) and Assistant Superintendents.

Kunz reviewed the Department’s briefing to the Legislature on the Department’s budget request for fiscal biennium years 2019 through 2021. She stated that the Department gave a joint briefing and presented to WAM and the Senate Committee on Education (“EDU”). She noted that the Department’s briefing highlighted success stories at schools, challenges, and fiscal components, including how the Department developed its budget around internal alignment, trade-offs and transfers, CIP, and Title IX requests. Kunz stated that the Department is carefully expending its budget and still has work to do around transparency, including showing how it is expending funds and how it is holding itself accountable. Kunz emphasized the importance of the Department driving strategic efforts forward through initiatives. She noted that the Department engages with the Legislature year-round and knows the potential questions that legislators may raise during hearings. Kunz stated that the Department is currently working through follow-up questions and received a joint memo from WAM and EDU. The Department will also receive a formalized memo from FIN and has a week to respond. Kunz highlighted that the Department’s internal budget team is taking the lead on these efforts.

Committee Chairperson Uemura stated that in the Department’s materials regarding Hawaii’s standing, Hawaii is 25th in the nation for revenue spent on public schools and 15th in the nation for per-pupil spending. He asked how the Department interprets these rankings, where it should be, and how it explains these rankings to the Legislature.
Kunz explained that these rankings are from the U.S. Census Bureau American Community Survey. She stated that it is hard to say where the Department should be. Kunz stated that the Department would like to be first in the nation in terms of how it expends funding and noted that it is in the middle and average in terms of how it spends revenue in public schools.

Committee Chairperson Uemura stated that the Department should have an idea of where it should be. He stated that it is not realistic to be first in the nation, but based on the rankings, it should have some idea of where it should realistically strive to be. Kunz stated that the Department could review what it would take to grow and how much additional revenue the Department would need to spend to move its ranking. Kishimoto stated that the intent behind these figures is to provide data that will allow the Department to engage the Legislature in a conversation regarding statewide goals. She noted that the Legislature determines where it wants Hawaii to be regarding education spending. Committee Chairperson Uemura stated that it would be a good idea for the Department to have an idea of where Hawaii should be and to have a general goal in mind.

Committee Chairperson Uemura stated that the Department’s CIP budget request is $539.5 million. He noted that total repair and maintenance (“R&M”) for FY 2024-2025 is $1.2 million. Dann Carlson, Assistant Superintendent, Office of School Facilities and Support Services (“OSFSS”), explained that the first two columns in the Department’s materials show the executive budget and further explained that the Department needs to create a six-year plan. He stated that the figures in the following columns are Board-approved requests.

Committee Chairperson Uemura stated that the executive budget is less than what the Department requested. He noted that the Department needs $868 million for R&M, and media reported that the Department’s identified need went from $293 million to $868 million. He asked whether the Department is projecting that the total will be over $1 billion in the next five years based on the facilities master plan. Carlson confirmed that this is correct. Committee Chairperson Uemura stated that the Board was unaware of this cost increase and that many Board Members found out about it from media coverage of the issue. Carlson stated that the Department has engaged with the Legislature for the last six months as it unraveled this issue, updated information, and entered it into a modernized single point of record. He confirmed that the Department briefed legislators but did not provide the full Board with an update prior to media coverage.

Committee Chairperson Uemura asked about the relationship between the Department’s overtime schedule and vacancies. Committee Chairperson Uemura asked whether a large percentage of overtime is due to the Department’s vacancies and whether the Department cannot fill vacancies. Kunz stated that some overtime is due to vacancies and the Department needing to cover that work. She noted that the payroll department has one of the higher percentages of overtime. Kunz stated that the Department requested to increase payroll staff in its budget to facilitate work. Committee Chairperson Uemura asked for overtime data and numbers because the Department did not include totals in its materials. Carlson provided another example of the connection between overtime and vacancies and noted that the Facilities Maintenance Branch had 17 vacant positions two years ago because it had a difficult time recruiting electricians and plumbers. He noted that the only way to maintain the work was for the Department to approve overtime for existing employees. Committee Chairperson Uemura stated that a reason for vacant positions is that the Department cannot find individuals to fill these positions at the current salary base.

Committee Chairperson Uemura stated that the contract for the consultant for Act 155 related work was not included in the Department’s list of active contracts as of December 1, 2018. He asked if this was an oversight or if he missed it in the Department’s list. Kunz stated that it is a manual process for the Department to update its contracts, so she would follow up on this.

Committee Vice Chairperson Voss expressed appreciation for the Department’s forthrightness on its publicized change in regards to its R&M backlog numbers because the Board uses the R&M backlog as a Strategic Plan indicator. He clarified that the Department did not misspend or inefficiently spend R&M funds and asked the Department to address this. Carlson attested that the Department properly spends funds. Carlson explained that in updating construction completion numbers in the R&M backlog, the Department found old estimates attached to projects for completion and projects taken off the backlog that the Department started but did not complete because of insufficient funds. When the Department modernized its record system, it had real-time data. Carlson stated that the Department has up-to-date data now and updates its system nightly. He explained that once the Department began inputting projects into its new system, it realized its backlog was larger than what was initially reported.

Committee Chairperson Uemura agreed with Committee Vice Chairperson Voss that the R&M backlog numbers was a mistake. He stated that the Committee always wants to know the issues it needs to address and now knows that the R&M backlog is larger than what was initially reported.

Committee Member Kili Namau‘u commended the Department and stated that she had the opportunity to attend both the WAM and FIN hearings. She highlighted that it was obvious that the Department was trying to anticipate questions and be as prepared as possible.

Committee Member Nolan Kawano commented on Smarter Balanced Assessment (“SBA”) scores and stated that he understands the Department reviews the average and compares it to average scores of the past three years. He stated that he views SBA scores differently. He noted that the Department’s data shows that the average proficiency for eleventh grade in mathematics is 32% and improving from past years. However, he views proficiency as decreasing over time rather than improving because the students in who took the SBA in eleventh grade in the most recent year of data also took the SBA in eighth grade three years prior and had higher proficiency rates then. Committee Member Kawano stated that subject matter experts will review the Department’s budget and asked how the Department plans to address deficiencies. He asked if the Department’s stance is that proficiency scores decrease as students progress through the school system.

Kunz stated that the Legislature asked the Department about the Department’s plans for improving mathematics. Donna Lum Kagawa, Assistant Superintendent, Office of Curriculum and Instructional Design, stated that math literacy is an area of concern. She noted that the Department added three new positions to support work around this. She contrasted current strategies against previous approaches. Previously, the Department would deploy professional development opportunities from the state level when there was a lack of progress. However, it did not have the means to measure whether this professional development made a difference. Currently, the Department’s team is embedded in the complex area and school levels and uses a coaching cycle. Kagawa highlighted that the Department implemented its model initially in the Aiea-Moanalua-Radford Complex Area, which includes the CAS, principal, classroom teachers, resources teachers, and other complex personnel. The Department’s goal is to apply and translate this model to other classrooms and to have CASs use this model in a feeder pattern. She stated that the Department still plans to deliver professional development, but it will also analyze correlation, causes, contributions, and root causes. She highlighted that the Department has already begun this work and is accumulating and analyzing data on an ongoing basis.

Committee Member Kawano stated that when he asked about the SBA in the past, specifically for eleventh grade mathematics, the Department explained that the test for eleventh graders emphasizes Algebra I and Algebra II. However, in order to graduate, the Department only requires students to take Algebra I. Committee Member Kawano stated that because of this, there are going to be a number of students who are not prepared to pass the exam. Committee Member Kawano also stated that a passing grade in public education is a “D.” However, students who receive a “D” have not mastered all concepts. He stated that the test itself, in addition to what the Department is teaching and its expectations, may lead to lower scores. He noted that the Department can implement mentoring, coaching, and analyzing, but it will continue to test students on subjects that they do not know. He stated that the Department should consider changing its test.

Kagawa stated that the Department would consider Committee Member Kawano’s input. She stated that in moving forward with the Board and Superintendent’s direction and vision, the Department might need to shift high-quality delivery and instructional components. She detailed that teachers have been discussing moving away from solely covering material and content and shifting to high-level practice and engaging students in high-level discourse. She emphasized the importance of an integrated approach and stated that changes would not happen overnight.

Kunz stated that under ESSA, the Department is required to report per-pupil expenditures beginning with FY 2017-2018. She stated that the Department is focusing on several different components in regards to laws, rules, and the Strategic Plan. She stated that the Department held two webinars for leadership, school principals, and school staff the previous week and created a tool for principals so that they could understand how the Department calculated data and use the tool to answer questions from the public.

Kunz stated that the Department excluded specific funds, such as student activity funds, adult education, capital outlay, debt services, and private funding sources. It included instruction, instructional support, student support services, food and transportation services, operation and maintenance of plant, fixed charges, administration, and EDN 700 (the budget for early learning) in its reporting. Kunz explained that student activity funds are for field trips, and private funding sources include grants from private entities. The Department divided expenditures by the number of students and detailed that the number of students includes the enrollment count of kindergarten through twelfth grade students receiving free public education as of October 1.

Kunz detailed the reasons the Department’s reports per-pupil expenditures. She stated that in addition to federal law, the Department follows state requirements, including Objective 3 of Goal 3 of the Strategic Plan, which is to increase efficiency and transparency of instructional and operational supports to promote student learning and help schools while stewarding public education resources. This reporting addresses the transparency component. She further detailed that Hawaii Revised Statutes Section 302A-1301 requires that the Department’s administrative expenditures not exceed 6.5% of the total operating budget and further requires that principals expend no less than 70% of total budget appropriations. Kunz explained that the Department excluded expenditures in its reporting in compliance with law.

Kunz stated that in FY 2017-2018, total school expenditures were $1.9 billion. At the school level, principals expended $1.3 billion, or 73%, of that total. Principals’ expenditures are exceeding the 70% state law requirement. The complex level expended 9% of all funds, and the state level expended 18% of all funds. She stated that centralized services paid on behalf of schools and students equates to $155 million at the complex level and $264 million at the state level. Kunz detailed adjustments to reflect centralized expenditures on schools’ behalf, including food services, utilities, student transportation, facilities, and special education. She stated that adjustments account for 94% of expenditures at the school level and 1% at the complex level, which fulfills state requirements.

Kunz clarified that certain expenses are not included in the Department’s appropriation, such as public charter schools, the State Public Charter School Commission, and fringe benefits. Kunz detailed that in order to have a number more comparable to other states, the Department added these expenses to the $1.9 billion in expenditures, which results in an adjusted support of schools of $2.6 billion. She detailed that the Department divided this by the revised enrollment to include Department and charter schools and came up with a total of $14,943 per-pupil expenditure.

Kunz detailed that schools will only be able to review their own expenditures. She noted that the Department expects principals to understand their allocation of money. Kunz stated that the average per-pupil expenditure at the school level for Department schools is $8,203. She stated that this is different from the total and detailed the factors behind variances and schools expending at different levels, including Weighted Student Formula (“WSF”) school characteristics, WSF student characteristics, Title I, special education, food service versus prep kitchen, and staff seniority. She stated that the top four variances relate to equity and targeted support. Kunz detailed that WSF distribution is meant to be equitable, and the Committee on Weights (“COW”) has tried to be equitable. WSF gives all schools base funding for their type of school and an additional weight for characteristics, like being a neighbor island school. The COW intentionally implemented base budgeting to handle small rural school populations. Kunz detailed factors that could drive variances, including Title I schools, special education expenditures, operational differences (like full-service kitchens versus serving meals cooked elsewhere), and staff seniority.

Kunz reviewed complex area and school-level per-pupil expenditures. She explained that elementary, middle, and high schools are included in this data but schools that combine these levels are not. She stated that these data help with complex area comparisons and help principals discuss and answer questions from their communities. Kunz reviewed per-pupil expenditures of individual schools within complex areas and further reviewed the amounts expended by principals and amounts expended at the state level. Kunz further reviewed expenses in order from highest to lowest and detailed federal expenditure levels for food services and Title I.

Kunz stated that because the Department has a single, statewide system, it pulled numbers from its state-level system and contrasted this to other states that need to pull data directly from schools because other states do not have a centralized accounting system. She highlighted that the Department has been working on this for 15 months. It prepped principals and received feedback. Kunz noted that comparisons with charter schools and schools in other states are not straightforward.

Committee Member Kawano asked how school vacancies factor in expenditure data. Kunz explained that schools have the authority to sell positions. Schools can sell positions, recoup money, and spend it on non-payroll items. If schools choose not sell position, they leave them vacant and these positions are not included as part of per-pupil expenditures.

Committee Member Kawano asked if numbers could be higher if schools do not sell vacant positions that they are unable to fill. Kunz confirmed that numbers could be higher in those instances.

Committee Member Kawano stated that schools express that they need more funding for students, but he stated that this report does not help him to understand these sentiments. Committee Member Kawano stated that individual schools measure benchmarks, and it would be helpful for the report to include side-by-side benchmarks to review whether schools need more funding. He stated that it is helpful to understand how schools are performing with the money they are given, especially if schools are not performing well.

Kunz stated that the Department is working on a dynamic report that may be able to shed more light on this topic and continue to drive the conversation. She noted that more money may not mean better results and stated that there may not be a direct correlation. Kunz stated that there are many components as to how to improve a school.

Committee Vice Chairperson Voss expressed surprise by the disparities in schools, especially the Campbell-Kapolei Complex Area. Kunz stated that the COW would review this report and these numbers. Committee Vice Chairperson Voss stated that more money does not equate to better performance, but noted that class size correlates with better student performance and expressed concern over the disparity.

Committee Chairperson Uemura asked whether the Committee should review the average per-pupil expenditure or the adjusted total. Kunz stated that it depends on the comparisons for which the Committee using the numbers. If the Committee is comparing to other states, it should review the adjusted total of $14,943 because it is closest to what other states are reporting, as it includes charter schools and fringe benefits. The average per-pupil expenditure for schools is to compare schools against one another because it only includes school-level expenditures.

Committee Chairperson Uemura asked whether the Department would be presenting the adjusted total to the Legislature. Kunz confirmed that this is the number the Department will present to the Legislature.

Committee Chairperson Uemura asked what happens with the per-pupil expenditure report. He asked if the details that the Department included for transparency purposes are required. Kunz stated that law does not require the additional detail.

Committee Chairperson Uemura asked if the Department is receiving feedback and anticipating questions. He asked if the Department would be able to review reports from other school districts. Kunz stated that other school districts should be publishing reports because school districts only report per-pupil expenditures. She stated that other states are not yet prepared to report this number and have asked to delay reporting for a year. Kunz explained that the Department was able to move forward without an extension because it could report using a centralized system. She stated that not every state would have these numbers available.

Committee Chairperson Uemura stated that he notices differences between complex areas and schools and noted that some of these differences skew the average. Kunz detailed several schools that receive categorical funds and explained that it takes extra funding to serve some of these schools, which is why some per-pupil expenditure levels are so much higher.

Carlson reviewed the history of impact fee implementation. He stated that the Legislature passed the school impact fee law in 2007. Carlson further reviewed areas of establishment for impact fees. He detailed that in April 2010, the Board adopted the West Hawaii School Impact Fee District. Carlson further detailed in June 2010, former Assistant Superintendent Randolph Moore met with former Hawaii County Mayor William Kenoi whom informed Moore that Hawaii County would not assist the Department in impact fee implementation.

Committee Chairperson Uemura asked if the Department is building schools in West Hawaii or if there is any new construction. Carlson stated that the Department has not built a school in the area since 2010.

Committee Member Kawano asked if the Department has the authority to suspend the implementation of impact fees. Carlson stated that the Department would engage with Hawaii County if it were willing to reengage. He stated that the Department is reanalyzing West Hawaii to see whether there is any potential for impact fees. Committee Member Kawano asked whether impact fees are optional for Hawaii County. Carlson explained that it is unprecedented, and he is unsure whether the Department has authority to do anything about it.

Committee Vice Chairperson Voss stated that he reviewed statute and understands that it is convenient for counties to collect impact fee assessments. However, statute does not require or suggest that counties collect the assessments. He questioned why the Department has not been assessing impact fees with the help of the Department of the Attorney General (“AG”). He noted that there will be population expansion and four new projects in West Hawaii. He asked why the Department is not moving ahead, making assessments, and bringing collection actions as developers do not pay.

Carlson detailed the mechanism that the Department uses. He stated that issuance of an impact fee occurs when a party pulls a permit. He explained that this process occurs through the counties’ Department of Planning and Permitting. Carlson detailed that the issuance of impact fee assessments occurs before the party receives a certificate of occupancy. Carlson explained that the Department has never had the personnel or resources to collect impact fees, which is one of the overall issues. He stated that the Department could approach the AG.

Committee Vice Chairperson Voss stated that statute is clear that the collection of impact fees is mandatory. He expressed understanding for how it is convenient if counties issue assessments but noted that the State can make an assessment and file a collection action if developers do not pay.

Kishimoto stated that the Department could revisit statute and review its procedures. Carlson added that the Department could approach the AG.

Committee Chairperson Uemura stated that no development or new schools are being built in West Hawaii. He noted that if the Department designated a school impact fee district, asked if it could assess new houses being built. Carlson confirmed that it could. He stated that the Department could keep funds in its account until there was demand for the Department to build to capacity. Committee Chairperson Uemura stated that the Department should have done this and noted that the Department’s current leadership inherited this issue. He stated that he would like to see progress to address the issue.

Carlson stated that in November 2010, the Board adopted the Central Maui and West Maui School Impact Fee Districts. The Department, with support from the Maui County Department of Planning, began collecting school impact fees for the Central Maui and West Maui districts. In January 2012, the Board adopted the Leeward Oahu School Impact Fee District, and in September 2013, the Department, with support from the City and County of Honolulu Department of Planning and Permitting, began collecting school impact fees. The most recent adoption was the Kalihi to Ala Moana School Impact Fee District. He stated that the Board amended policy on design enrollment guidelines to address urban areas, and the Department began collection of school impact fees in October 2018.

Carlson shared the impact fee account balances by construction and land costs since January 2011 for each impact fee district. The Department started collecting impact fees from Maui in 2011 and from Oahu in 2013. Over this period, a total of $5 million was collected.

Committee Chairperson Uemura asked if the Department uses these funds to offset construction at schools or if they sit in an account. Carlson stated that the Department has yet to expend the funds. He stated that the Department is formulating a plan for how best to use the funds. He stated that the Department would need to use the funds toward building of capacity. With current account balances, the Department cannot build an entire facility, but it can help to offset the cost of future projects.

Committee Chairperson Uemura asked if the Department has reviewed leveraging the funds to finance building. Carlson stated that the Department has not as of yet. Committee Chairperson Uemura stated that there is an opportunity for the Department to review this and noted that the Department could always leverage to borrow to increase capacity.

Committee Chairperson Uemura asked if the Department has to spend funds within the district from which it collected funds. Carlson confirmed that it does and explained that this is why the Department keeps collected funds in different accounts. Committee Chairperson Uemura asked if the Department continues to collect fees in the impact fee districts as houses are built. Carlson confirmed that the Department is still collecting in these impact fee districts. Committee Chairperson Uemura asked if the funds are earning interest and asked how the Department is managing the funds. Carlson stated that the funds sit in accounts and earn interest. He stated that he is unsure of what the interest rates are. Committee Chairperson Uemura suggested that the Department review utilizing these funds to finance debt. He stated that the Department could use these funds toward R&M to address capacity issues. He stated that he does not want funds sitting idly in an account and noted that Kishimoto agreed and is engaging in discussions regarding this issue. Committee Chairperson Uemura stated that he wants to ensure that the Department reports on a quarterly basis when it reports on budget updates and includes updates on these funds.

Committee Member Kawano noted that there are capacity issues in Leeward Oahu and at Mililani Middle School. He asked if the Department has identified the schools with capacity issues and aligned these schools and issues with funds. Carlson stated that the Department is aware of capacity issues, which is why it created a six-year plan to address capacity. He stated that the Department has discussed utilizing impact fee funds when projects are short of funding. Carlson detailed that the Department could use current account balances to pay for a portable, but it would be difficult to fully address capacity issues with these funds. Committee Member Kawano asked if the Department would need additional funding to address capacity and asked whether the impact fee funds will remain in their accounts unless there is a shortage. Carlson stated that the Department is working on a plan to address how to expend the impact fee funds and could get back to the Committee on its plans. Committee Member Kawano asked if the Department plans to report on the impact fee fund balances on a quarterly basis. Carlson confirmed that it does. Committee Member Kawano asked that the quarterly reports include the Department’s plans to expend the impact fee funds in addition to balances.

Carlson detailed fair share contribution balances. He detailed a situation that occurred within the Campbell-Kapolei Complex Area and explained how the Department negotiated a high school site, middle school site, and three elementary schools for buildout in that subdivision.

Committee Vice Chairperson Voss asked about the account balance for Kapolei Lofts, which the Department presented as being over $2 million. Carlson explained that it is the fair share amount to which the Department agreed and the developer paid. He noted that the Department would provide the Committee with a plan as to how it would expend this money once it creates a plan.

Committee Vice Chairperson Voss commented that impact fee balances are in the hundreds of thousands of dollars while account balances are in the millions. Carlson explained that the Department reached an agreement with the developer on the fee to offset development. He detailed impacts in the Kapolei area, including its most recent elementary school, and further detailed how $2 million comes close to the total offset, which includes donated land and construction costs.

Committee Chairperson Uemura detailed impact fee calculations and asked if these payments are for land. Carlson clarified that developers donated land to the Department to build a school and detailed that $2 million is a result of 100% of land and up to 10% of construction cost. Committee Chairperson Uemura asked if these account balances represent construction cost. Carlson confirmed that they do.

Committee Chairperson Uemura asked if the Department would need to determine how to use these funds within specific impact fee districts. Carlson confirmed that this is correct. Committee Chairperson Uemura stated that the Department has close to $14 million that it could use on its balance sheet currently. He stated that he would like to know what the Department plans to do with these amounts in the future. Carlson stated that the Department would like to report on this quarterly. Committee Chairperson Uemura stated that monthly reporting keeps the Department accountable but agreed to quarterly reporting based on the Department’s need to resolve issues. He stated that the Department should provide the Committee with a plan in April.

Committee Vice Chairperson Voss stated that statute subjects an expenditure plan for all collected impact fees to legislative approval. He asked if the Department has included this information in its budget submittals to the Legislature. Carlson stated that it has not because it has not expended any funds. Committee Vice Chairperson Voss stated that statute refers to an expenditure plan. Carlson explained that the Department has been submitting reports to the Legislature, but expenditures to date have been zero.

Committee Chairperson Uemura asked about the reports the Department submits to the Legislature. Carlson stated that the Department submits reports on impact fees each legislative session similar to the reports it submits for Act 155. Carlson detailed fair share contributions and explained how the Department reaches fair share contributions upon agreement with developers. He noted that these contributions are historic and have been around prior to impact fees.

Committee Member Kawano referred to Carlson’s earlier comment about some balances not being significant enough for the Department to expend. He encouraged the Department to review the statutory requirements. He stated that the Department could also review the need for potential legislative amendments so that it could expend funds so that they do not sit in an account for a long time. Amendments could include a threshhold. For example, if a balance sits in an account for five years, the Department could move it rather than wait until the amount is significant. Carlson stated that the Department could review this.

Committee Chairperson Uemura stated that he would like to know whether the Department has ever expended funds from these accounts if these funds and accounts predate impact fees. He stated that he wants to ensure that the Department is doing things properly. Carlson stated that the Department has expended funds from its fair share accounts. Committee Chairperson Uemura stated that he would like descriptions and details of expenditures under fair share balances.

Kishimoto emphasized the importance of the Department reporting on a quarterly basis. Committee Chairperson Uemura agreed and stated that quarterly reporting is sufficient if the Department provides the information that the Committee requested.

Carlson stated that the Department expended funds from its fair share accounts for two projects, including Kapolei High School’s cafeteria. Committee Chairperson Uemura asked whether the Board or Superintendent gave approval for these expenditures. Carlson stated that the Department would answer the Committee’s questions and requests during its quarterly update in April.


V. Recommendation for Action
Kishimoto stated that Act 155 allows the Department to implement an innovative pilot program to generate resources from Department facilities to modernize and improve schools. She highlighted that the Legislature has been working with the Board, and Act 155 is one approach to generate funds by utilizing land assets. Kishimoto detailed that Act 155 allows the Department to identify up to five public school land sites as candidates for participation in the pilot. She stated that the Department has been going through the process and determining how to navigate from an innovative law to actualization. Kishimoto emphasized the importance of communication throughout the process. She stated that the Department is seeking approval to lease three sites as allowable by statute. Kishimoto stated that Act 155’s lease terms of 55 years are restrictive. She detailed that based on request for information (“RFI”) responses, changing the maximum lease term from 55 years to 99 years is more desirable. Kishimoto highlighted that the Department is exploring what it would take during legislative session to amend that particular restriction. She highlighted that the Department’s goal is to ensure that the first three pilot projects provide a model of success that allows the Department to go from a lease agreement to generating funds that will help to modernize schools.

Kishimoto detailed that the Department provided a list of sites to the Board in May 2018 and narrowed its list of sites to seven potential sites. It issued an RFI after discussions with the Committee to seek more information regarding which developers want to work with the Department and for what purpose. She stated that the Department published an RFI in August 2018 and received three letters of interest and one letter with questions in October 2018. In November 2018, the Department briefed the Department on the results of the RFI. Kishimoto reviewed comments from developers. She stated that some developers showed interest in more than one site. She highlighted that the Department has in-state models and has partnered with the Hawaii Housing Finance and Development Corporation (“HHFDC”) to review potentially amending statute to include a 99-year leasehold.

John Chung, Public Works Manager, Project Management Section, OSFSS, stated that the Department engaged in a preliminary assessment to provide a baseline for further analysis. The preliminary assessment was based on the Department’s potential needs if it were to lease out properties. He detailed that the Department reviewed net revenue, which is an estimate of lease revenue minus expenditures. He stated that the annual lease revenue is a return of 8% of land value for parcels zoned for commercial uses. To calculate expenditures, the Department reviewed displacement expenses and functional use of space. He stated that the 22nd Avenue site and the Diamond Head site have warehouse space that the Department is currently using to service schools. If it uses one of these spaces for the pilot, it would need to find equivalent space for staff. One of the annual displacement expenses is commercial office space lease rent at $6,700 per person. Chung stated that in order to derive this rate, the Department reviewed current lease agreements and consulted with real estate agents. The Department also reviewed sunk capital costs. He detailed that the Department invested money in some sites. He stated that there are different ways to analyze sunk capital costs. Chung noted that capital improvement expenses are not fully depreciated and sunk capital costs are not factored into net revenue. Rather, the Department identifies them as a fixed asset write off. Chung highlighted that developers can be creative in how they prepare proposals, and the Department would give them autonomy to propose ideas to help the Department with sunk capital.

Chung reviewed site-specific information. He stated that for the Young Street property, the Department would need to displace 21 office staff from the OSFSS’s Auxiliary Services Branch and School Transportation Services Branch. He stated that the estimated annual commercial office space rent for displaced staff is $140,700, and the estimated annual revenue is $642,272. The net revenue is $501,572. Chung detailed that for the Koko Head Avenue site, the Department would need to displace 30 staff. The net revenue for this site is $64,936. Chung reviewed the Waialae Avenue site. He stated that the Department houses 140 staff at this site from the OSFSS Assistant Superintendent’s office, Facilities Development Branch, Project Control Section, Data Governance Branch, and Safety, Security, and Emergency Preparedness Branch. He noted that this site also houses the Department’s primary data center, which serves all schools and offices statewide. Chung stated that this site has significant sunk capital costs and detailed that the Department invested $6 million in its data center. He detailed that it cost $1.6 million for the Department to convert classroom spaces to office spaces, and it cost $1.3 million for a pilot photovoltaic microgrid system. Chung detailed that the Diamond Head site houses 40 staff from the OSFSS. Its location is key and is in close proximity to all campuses. Furthermore, this site services the Honolulu area. Chung noted that the displacement of staff for this site is one issue, but another issue is that it would be a challenge for the Department to find a functional space for staff in the same area. Furthermore, the Department uses this site for staging during emergencies. Chung detailed that the 22nd Avenue site houses staff and is also a commercial warehouse space.

Chung reviewed Kaimuki High School and McKinley High School. He noted that the proposal is for the Department to use one acre of land from Kaimuki High School. He stated that the Department had not yet determined the portion of property to utilize from these two sites and had not identified how much land to utilize.

Chung stated that based on the Department’s simple analysis and based on interest expressed during the RFI process, the Department recommends that the Board approve Waialae Avenue, Diamond Head, and 22nd Avenue as candidates for participation in the pilot program and allow the Department to seek further interest to develop these sites.

Carlson clarified that the Department is requesting to proceed with these three sites. He noted that this does not ultimately mean that the Department would utilize these three sites for the pilot program. He stated that the Department may encounter unforeseen issues and still needs to complete its due diligence.

Committee Chairperson Uemura stated that the Department needs to return to the Board after completing due diligence for approval to proceed. Carlson stated that if the Department works with HHFDC, it could publish a request for proposals (“RFP”) and negotiate with a developer. He stated that it would seek the Board’s approval prior to proceeding.

Committee Member Catherine Payne stated that the Department calculated a negative net revenue for the Waialae Avenue site. She asked if this is subject to change after the Department begins discussions with developers. Carlson confirmed that it is. He explained that the net revenue calculation is due to the Department’s displacement expenses and functional use of space for that particular site. Carlson highlighted that developers expressed the most interest in this site and stated that creative developers may be able to figure out how to offset these issues.

Committee Member Payne stated that this would be an important consideration because the Department needs sites to generate revenue. Kishimoto stated that the Department would need to consider its data center as part of the design and noted that there are many considerations.

Committee Member Dwight Takeno commented on developers showing no interest in sites and asked about the Department’s analysis and calculations. Chung stated that the Department’s revenue calculations are based on properties being upzoned to commercial use. Committee Member Takeno asked about the Department’s generation of profit and potential profit margins. Chung further detailed the Department’s analysis.

Committee Vice Chairperson Voss stated that he agrees with the Department publishing a RFP for the 22nd Avenue and Diamond Head sites as soon as practical. He stated that he does not see how the Waialae Avenue site makes sense for a pilot project due to its sunk costs and substantial relocation costs. He stated that these are predicated on upzoning, which is time consuming and costly. He stated that it would only make sense if the site developed into a mixed-use residential site. Committee Vice Chairperson Voss stated that it appears the Department included it in its recommendation in order to recommend three sites.

Committee Vice Chairperson Voss stated that Act 155 provides the Department with opportunities, and the Department should be learning from the pilot project. He noted that he recognizes the challenges of a school site development but stated that he does not understand how this is a learning experience for the Department if it did not include a school site in its first pilot project group. Carlson stated that the Department wants to move in this direction. He stated that the Department anticipates it will complete its facilities master plan by the end of February. He detailed that the Department published RFIs for both school sites, but developers only had a few questions. He stated that the Department is open to a school site.

Committee Chairperson Uemura stated that the Department may need to potentially review school sites if one of its current recommendations falls through. He stated that this is dependent on how the Department progresses. Carlson stated that the idea of Act 155 is for the Department to implement a pilot and expand it across the district.

Committee Chairperson Uemura stated that revenue generation is one component, and a hybrid is another component. He noted that a hybrid may not necessarily generate much revenue, but it could provide something else of value to the school. Committee Chairperson Uemura stated that the Department has three components on which it should focus.

Committee Vice Chairperson Voss asked if two of the sites are more ready for development than the third site. He stated that the third site is questionable and asked about the Department’s process on moving forward with two candidates to prove whether these candidates are viable. Carlson stated that the Department is working with HHFDC and a group of developer experts. He stated that developers have shown interest in the 22nd Avenue site but have not yet signed anything. He noted that HFFDC has not shown interest in the Diamond Head or Waialae Avenue sites. However, the Department can publish an RFP for the Waialae Avenue site because developers have shown interest. Committee Vice Chairperson Voss stated that the statute specifically references an RFP as the method of procurement. He stated that it is prudent to avoid challenges by going through an RFP.

Ex Officio Committee Member Bergin asked what the Department’s plans are for relocating the 150 staff members in its 22nd Avenue site. Carlson stated that the Department would like to keep this staff together but does not yet have a facility in mind. Ex Officio Committee Member Bergin stated that she would like to hear the Department’s plan in the future.

Committee Member Kawano stated that the Department needed to first identify five potential sites and then move forward on three. He stated that his understanding of statute is that during the selection and consideration of five sites, the Board needs to hold community meetings at each location. He asked if the Board held any community meetings. Carlson stated that each of the Department’s meetings were public and part of public record. Committee Member Kawano stated that statute refers to meetings in each affected community. Carlson stated that communication and community engagement would be a critical component moving forward. Committee Member Kawano stated that he is unsure that this is the intent of statute.

Kishimoto stated that the Department could review whether its interpretation of statute is correct. She detailed considerations for sites before engaging the community and explained that the Department would not want to have to replace sites after it already engaged the community, which may have to happen after due diligence.

Committee Chairperson Uemura stated that the Department would need to conduct further due diligence and then the Board would approve three sites. He stated that the Department would facilitate review of these sites, which would include community meetings.

Committee Vice Chairperson Voss agreed with Committee Member Kawano. He stated that statute states that the Board needs to hold at least one public meeting in the affected community. He stated that the Board could not select three sites until it holds a public meeting. He stated that the Committee needs to select sites for further due diligence.

Committee Member Kawano stated that the Committee does not need to approve three sites during this meeting. He stated that the Committee approved three sites for due diligence and needs to hold community meetings. It can select three sites after it holds public meetings.

Committee Chairperson Uemura stated that the process is for the Committee to narrow five sites to three, the Department would complete its due diligence for final approval, and then the Committee would hold public meetings so it could act on the Department’s recommendation. He stated that he wants the Department to complete due diligence on the three sites the Committee narrowed down from five. Carlson agreed with Committee Chairperson Uemura. He stated that the Department does not know the issues or challenges may arise from due diligence. He noted that the Committee instructed the Department to hold off on its due diligence initially because the Board had not selected sites. He stated that the Department is requesting approval to pursue these three sites, work on community engagement, and hold public hearings.

Committee Vice Chairperson Voss expressed concern and stated that he agrees with Committee Member Kawano’s interpretation. He stated that the Committee is not selecting any of the sites for the pilot project. It is identifying sites for due diligence. Committee Chairperson Uemura agreed with Committee Vice Chairperson Voss that the Committee is identifying sites for due diligence. He stated that the Committee is narrowing down the list of sites to three so that the Department does not need to work on all seven sites.

Committee Member Takeno expressed concern and asked when the Department would hold public meetings with the Board. He asked if this would occur in the same timeframe as due diligence or after due diligence. Committee Chairperson Uemura stated that the Department would do its due diligence and engage with developers who expressed interest or publish an RFP. He noted that developers may change their minds or sites may not be viable. He stated that the Committee is giving approval to the Department to engage with developers, discuss lease terms and properties, and report to the Committee on the sites that are viable. He stated that this is not the selection for the pilot project but a step in the process.

Carlson stated that the Department would hold public hearings prior to reaching an agreement with developers on terms. Committee Member Takeno asked if the Board would need to hold public hearings. Carlson confirmed that it is a statutory requirement.

Committee Member Kawano stated that the Committee previously gave the Department authority to include up to seven public schools to participate in the pilot. He stated that that these three candidates are not the finalists as participants in the pilot program.

Committee Vice Chairperson Voss stated that prior to the Board taking action on the final selection, the Board would need to stage public hearings in affected communities.

Committee Chairperson Uemura reviewed the Department’s presentation and noted that the Department’s information is not clear on the procurement process. He stated that he wants the Department to understand that Act 155 expects revenue generation, but the Department needs to determine how it would use revenue to align with the Strategic Plan. He stated that the Department could use revenue for R&M, to build 21st century schools, or to renovate 21st century classrooms. He detailed that the Department may need to general bond financing and leverage to obtain more funding to build. Committee Chairperson Uemura stated that the Department should think ahead and be strategic once it receives revenue, similar to impact fees. It needs to plan how it will use funds and then can plan for different areas.

Committee Chairperson Uemura detailed developer comments and commented on HHFDC and other issues pertaining to redevelopment. He further detailed exceptions to leases and described how the Department could move forward on the development process by working with HHFDC. Committee Chairperson Uemura expressed concern over revenue amounts and noted that some of these properties will not generate revenue, but can help the Department achieve other objectives. He stated that the Department needed to let the Committee know the criteria it used when it presented its seven sites. He stated that the Department used Jacobs Engineering and six or seven matrices to determine criteria.
Committee Chairperson Uemura noted that the Department listed two schools as the highest revenue generating sites. Carlson explained that the Department reviewed all schools but primarily had data on Honolulu district. It used a rubric to identify those seven sites as having the highest potential. He detailed that this was a data-driven, intentional decision to move forward with those seven sites.

Committee Chairperson Uemura stated that the Committee needs justification as to why the Department identified these three sites and did not recommend the other four sites out of the seven. Chung explained that the Department identified these three sites based upon the interest it received from the RFI responses. He noted that it would not be worthwhile to suggest sites in which developers are not interested. Furthermore, the remaining sites had issues with size or ownership. He stated that these three sites are the best sites for the Department to move forward on.

Committee Member Kawano stated that the Department previously presented on impact fee balances and fair share contribution. He noted that it might be helpful to seek legislative amendments so that the Department could use funding from those accounts for Act 155 purposes.
ACTION: Amended main motion to recommend to the Board to approve three sites for further due diligence and investigation by the Department, including issuing an RFP or RFI, as described in the Department’s memorandum dated January 17, 2019; such approval does not constitute final site selection, and prior to final site selection, the Board will hold a meeting in any affected community (Voss/Kawano). The motion carried unanimously with all members present voting aye.


VI. Adjournment

Committee Chairperson Uemura adjourned the meeting at 1:34 p.m.