[Audit Report on Followup of Recommendations  Concerning the Hawaiian Homes Commission,  Office of the Secretary]
[From the U.S. Government Printing Office, www.gpo.gov]

Report No. 00-i-500

Title: Audit Report on Followup of Recommendations  Concerning
       the Hawaiian Homes Commission,  Office of the Secretary

Date:  June 16, 2000


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U.S. Department of the Interior
Office of Inspector General



AUDIT REPORT
FOLLOWUP OF RECOMMENDATIONS 
CONCERNING THE
HAWAIIAN HOMES COMMISSION,
OFFICE OF THE SECRETARY


REPORT NO. 00-I-500

JUNE 2000





EXECUTIVE SUMMARY

Followup of Recommendations Concerning
the Hawaiian Homes Commission,
Office of the Secretary (No. 00-i-500)

BACKGROUND

The Hawaiian Homes Commission Act of 1920 (42 Stat. 108) was
enacted in July 1921 "to rehabilitate native Hawaiians on lands
given the status of Hawaiian home lands."  The Act was
administered by the Hawaii territorial government until the
Hawaiian Islands became a state in 1959.  At that time, the State
of Hawaii assumed responsibility for the administration of the
Home Lands Program through the Department of Hawaiian Home Lands
(DHHL), which was headed by the Hawaiian Homes Commission, a
policy-making board.  Additional State and Federal legislation
related to Hawaiian home lands was enacted in 1995.

As of June 30, 1998, the DHHL owned about 197,673 acres of land
on the islands of Kauai, Oahu, Molokai, Maui, and Hawaii and had
issued 5,189 residential leases; 1,057 agricultural leases; 301
pastoral leases; 118 general leases; and 94 revocable  permits,
which included permits for agricultural, pastoral, and commercial
purposes.  For the fiscal year ended May 31, 1999, the DHHL had
total revenues of $126.4 million and expenditures of $55.7
million.  In addition, the DHHL reported outstanding direct loans
of $48.9 million and guaranteed loans of $127.8 million.

OBJECTIVE

The objective of our audit was to determine whether the U.S.
Department of the Interior, the State of Hawaii, the Attorney
General of Hawaii, and the Hawaiian Homes Commission had
satisfactorily implemented the eight recommendations contained in
our March 1992 audit report "Hawaiian Homes Commission, Office of
the Secretary" (No. 92-I-641).

RESULTS IN BRIEF

Of the eight recommendations contained in the March 1992 report,
we found that seven recommendations had been resolved and
implemented and one recommendation had been withdrawn.  The
followup report did not contain any recommendations.



                                                N-IN-OSS-005-99-M
AUDIT REPORT

Memorandum

     To:  Assistant Secretary for Policy,
          Management and Budget

   From:  Roger La Rouche, Acting Assistant 
          Inspector General for Audits

Subject:  Audit Report on Followup of Recommendations 
          Concerning the Hawaiian Homes Commission, 
          Office of the Secretary (No. 00-i-500)

This report presents the results of our followup review of
recommendations concerning the Hawaiian Homes Commission.  The
objective of our audit was to determine whether the U.S.
Department of the Interior, the State of Hawaii, the Attorney
General of Hawaii, and the Hawaiian Homes Commission had
satisfactorily implemented the eight recommendations contained in
our March 1992 audit report "Hawaiian Homes Commission, Office of
the Secretary" (No. 92-I-641) and whether any new recommendations
were warranted.

BACKGROUND

The Hawaiian Homes Commission Act of 1920 (42 Stat. 108) was
enacted in July 1921 "to rehabilitate native Hawaiians on lands
given the status of Hawaiian home lands."  The Act was
administered by the Hawaii territorial government until the
Hawaiian Islands became a state in 1959.  At that time, the State
of Hawaii assumed responsibility for the administration of the
Home Lands Program through the Department of Hawaiian Home Lands
(DHHL), which was headed by the Hawaiian Homes Commission, a
policy-making board.

In 1991, the Legislature accepted the Governor's "Action Plan to
Address Controversies under the Hawaiian Home Lands Trust and
Public Land Trust." The Governor convened a task force composed
of representatives from the DHHL, the Office of State Planning,
the Department of Land and Natural Resources, and the Department
of the Attorney General.  The task force was responsible for
verifying title claims, determining whether improper uses were
still in existence and whether these uses should be canceled or
continued if authorized by the Commission, conducting appraisals
and determining appropriate compensation for past and continued
use of Hawaiian home lands, and pursuing all options for the
return of lands and compensation from the Federal Government for
wrongful actions during the territorial period.  The task force's
actions led to 16,518 acres of public lands being conveyed by the
State to the Hawaiian Homes Commission.

In June 1995, the Governor approved  Act 14, which, among other
provisions, reaffirmed  the State's intent to resolve
controversies related to the Hawaiian home lands trust that arose
through July 1, 1988; prohibited any and all future claims
against the State; and established a trust fund to provide "a
substantial, secure, and predictable funding source for the
department of Hawaiian home lands."  Act 14 required the State to
make annual deposits of $30 million for 20 years into the trust
fund, beginning in fiscal year 1996.

In November 1995, the U.S. Congress enacted the Hawaiian Home
Lands Recovery Act of 1995 (Public Law 104-42), which authorized
the United States to convey certain real property to the DHHL in
exchange for full settlement and release of all claims arising
from or relating to United States ownership and continued use of
real property identified as "available lands" for native
Hawaiians under the Hawaiian Homes Commission Act of 1920.  On
August 31, 1998, the United States and the State of Hawaii
entered into a memorandum of agreement to implement the Hawaiian
Home Lands Recovery Act of 1995.

As of June 30, 1998, the DHHL owned about 197,673 acres of land
on the islands of Kauai, Oahu, Molokai, Maui, and Hawaii and had
issued 5,189 residential leases; 1,057 agricultural leases; 301
pastoral leases; 118 general leases; and 94 revocable  permits,
which included permits for agricultural, pastoral, and commercial
purposes.  For the fiscal year ended June 30, 1999, the DHHL had
total revenues of $299.2 million and expenditures of $80.1
million.  In addition, the DHHL reported outstanding direct loans
of $48.9 million and guaranteed loans of $127.8 million.

SCOPE OF AUDIT

The scope of the audit included a review of actions taken by the
U.S. Department of the Interior, the State of Hawaii, the
Attorney General of Hawaii, and the Hawaiian Homes Commission to
implement the eight recommendations contained in our March 1992
audit report.  To accomplish our audit objective, we interviewed
officials and/or reviewed records at the State of Hawaii's Office
of the Governor; the State's Office of the Auditor; the
Departments of Hawaiian Home Lands, Accounting and General
Services, and the Attorney General; and the Hawaiian Homes
Commission.  In addition, we interviewed officials from the U.S.
Department of the Interior's Office of the Secretary and Office
of Insular Affairs; the U.S. Departments of Housing and Urban
Development and Veterans Affairs; and the U.S. Small Business
Administration.

The audit was conducted  in accordance with the "Government
Auditing Standards," issued by the Comptroller General of the
United States.   Accordingly, we included such tests of records
and other auditing procedures that were considered necessary
under the circumstances.

As part of the audit, we evaluated the Commission's internal
controls related to the DHHL's financial and operational
management of the Hawaiian Home Lands Program to the extent that
we considered necessary to accomplish the audit objective.  With
regard to the prior audit recommendations, we did not identify
any internal control weaknesses.  During our followup audit,
however, we identified internal control weaknesses related to the
collection of delinquent loans and property taxes owed by
Hawaiian Home Land lessees and to the legal limit on the total
amount of the outstanding guaranteed loans made to Hawaiian Home
Land lessees.  These weaknesses will be discussed in a separate
audit report on the Department of Hawaiian Home Lands.

PRIOR AUDIT COVERAGE

Our March 1992 audit report had eight recommendations: three
recommendations to the Secretary of the Interior, three
recommendations to the Governor of Hawaii, one recommendation to
the Attorney General of Hawaii, and one recommendation to the
Hawaiian Homes Commission.  In addition to our March 1992 audit
report that was the subject of this followup audit, in December
1993, the State's Office of the Auditor issued the audit report
"Management and Financial Audit of the Department of Hawaiian
Home Lands" (No. 93-22), which stated that (1) the Commission had
not asserted its authority to direct and hold the DHHL
accountable for effectively managing the program, resulting in
the ineffective collection of delinquent loans, and (2) the DHHL
continued to guarantee loans, even though it had exceeded the
statutory limit by more than $5.8 million.  Our current audit
disclosed that both deficiencies still existed, and those issues
will be discussed in our separate audit report on the Department
of Hawaiian Home Lands.

RESULTS OF AUDIT

Of the eight recommendations made in the March 1992 report, we
found that seven recommendations had been resolved and
implemented and one recommendation had been withdrawn (see the
Appendix), as discussed in the paragraphs that follow.

Prior Audit Report Recommendations

Recommendation A.1.  The Secretary of the Interior [should]
direct appropriate Department of the Interior officials to
establish an oversight system for monitoring the State of
Hawaii's activities in discharging State trust obligations in
regard to the Hawaiian Homes Commission Act.

The prior audit found that the Department did not effectively
fulfill its oversight responsibility to ensure that the State
discharged its trust obligations for the Hawaiian Home Lands
Program.  A 1983 Federal-State Task Force had recommended that
the United States (1) be aware of the manner in which the State
manages and disposes of trust lands, (2) satisfy itself that the
State is not abusing its responsibilities as trustee, and (3)
institute proceedings against the State for breach of trust if
the State fails to properly discharge its responsibilities.
Although this 3-part statement of the responsibilities was to be
reflected in the Department's decision making as lead agency and
in the duties assigned to the official who was designated as the
Department's point of contact, the Department had not effectively
fulfilled its oversight responsibilities.

In our followup review, we found that in February 1992, the
Secretary appointed a Designated Officer to monitor compliance
with the Hawaiian Homes Commission Act.  The Department had also
implemented a monitoring system that involved (1) reviewing and
approving all land exchanges under the Act and (2) reviewing any
amendments to the Act requested by the State.  Under the Act,
such amendments are required to be reviewed by the Secretary.
Therefore, we consider the recommendation resolved and
implemented, and no further action is required.

Recommendation A.2.  The Secretary [should] inform the State of
Hawaii of the types of assistance that the Department is willing
to provide and identify the circumstances which will or will not
require reimbursement.

The prior audit found that the 1983 Federal-State Task Force had
recommended that the State and the United States each make
matching contributions of $25 million annually to survey the
lands to be awarded and to design and construct needed site
improvements, such as roads, water, utilities, and sewer systems.
Neither the State nor the United States, however, had made the
required matching contributions.  The prior audit also found that
the Hawaiian Homes Commission Act did not require the Federal
Government to make contributions of funds or services and that
recent Federal assistance provided  to the Commission had been
minimal.  In 1989, the Commission received Community Development
Block grants totaling $1.2 million from the U.S. Department of
Housing and Urban Development for the purpose of constructing
road and drainage improvements on homestead lands.

In our followup review, we found that the Department had
subsequently entered into agreements with the DHHL to provide
technical assistance on investigating the groundwater resources
on Molokai.  A preliminary study of the Kualapuu Aquifer on
Molokai began in April 1992 to compile well construction
information and to design a groundwater availability study.  A
subsequent study on groundwater resources in Molokai was
performed by the U.S. Geological Survey in October 1996.   In
addition, in a February 1992 letter to the  the Office of
Inspector General, the Designated Officer stated that "we have
often made known to the Department of Hawaiian Home Lands our
willingness to provide technical assistance from Interior's
resources. . . .  Our position has therefore been that we stand
ready to help."  Since our March 1992 report, Interior has not
provided the DHHL with any financial assistance or required that
the DHHL provide reimbursement for technical assistance received.
Accordingly, we consider the recommendation resolved and
implemented, and no further action is required.

Recommendation A.3.  The Secretary [should] determine and inform
the Congress of any amendments to the Act, enacted by the State
of Hawaii, which diminish the benefits to native Hawaiians or are
otherwise contrary to the intent of the Act.

The prior audit found that improper land transfers and improper
land use occurred and that 1980 correspondence from the U.S.
Departments of Justice and the Interior indicated that basic
problems continued in the State's administration of the Hawaiian
Homes Commission Act.  The intent of the recommendation was to
ensure that any future amendments to the Act did not result in
transfers or uses of Hawaiian home lands that would further
diminish the benefits available to native Hawaiians.

In our followup review, we found correspondence indicating that
the Department had reviewed amendments to the Act and that none
of the amendments diminished benefits to the native Hawaiians.
Therefore, we consider the recommendation resolved and
implemented, and no further action is required.

Recommendation A.4.  The Governor of the State of Hawaii [should]
direct the Hawaiian Homes Commission to develop a comprehensive
home lands infrastructure development plan that provides for the
systematic preparation of lots for use and occupancy.

The prior audit found that the State's performance as trustee for
the Hawaiian Home Lands Program was "highly deficient" in terms
of meeting the needs of its beneficiaries.  Specifically, the
Commission had not made significant progress in awarding
homestead lots because it did not have a comprehensive land use
or infrastructure development plan.

In our followup review, we found that in a June 4, 1992 letter to
the Office of Inspector General, the Governor concurred with the
recommendation and stated that he "will direct" the DHHL "to
develop such  plan."  On July 16, 1999, the Governor approved the
expenditure of $100,000 to update the DHHL's general plan.
Section 4.05 of the request for the  proposals required potential
contractors to "compile and summarize existing information
relating to land use for the Hawaiian home lands inventory."  The
section further stated, "Summary profiles shall include, but not
be limited to, land, water, infrastructure, financing,
beneficiary information, etc."  On August 12, 1999, a contract to
update DHHL's general plan was awarded.  Therefore, we consider
the recommendation resolved and implemented, and no further
action is required.

Recommendation A.5.  The Governor [should] propose legislation,
based on the results of the Homes Commission's infrastructure
development plan, to sufficiently fund the Home Lands Program in
accordance with the State Constitution.

Recommendation A.6.  The Governor [should] propose legislation to
provide adequate funding to the Hawaiian Homes Commission's
Hawaiian home loan fund.

The prior audit found that the Commission did not provide
adequate financial assistance to lessees who were awarded
homesteads during an accelerated application program.  Also,
lessees who were selected to receive homesteads after the
acceleration period did not receive a homestead award unless they
qualified for a Federal Housing Administration or Farmers Home
Administration loan guaranteed by the DHHL.  These deficiencies
occurred because the Commission changed its policy from
distributing usable land and providing financial assistance to
constructing turn-key houses for sale only to beneficiaries who
qualified for Federal Housing Administration or Farmers Home
Administration loans.  As a result, of the 1,731 beneficiaries
who were awarded residential lots during the acceleration
program, only 105 had built homes, and native Hawaiians were
denied homestead awards unless they qualified for home loans from
sources external to the Commission.

Our followup review disclosed that in the June 4, 1992 letter,
the Governor concurred with the recommendation and stated that he
"will submit an administration budget request to sufficiently
fund the infrastructure development plan."  Further, the letter
stated that "in the 1992  legislative session, the Governor
requested $25 million for infrastructure development for DHHL"
and that the Governor "will work with DHHL to request sufficient
capital improvement project funds each legislative session."  We
also found that in 1995, the Legislature and the Governor
approved Act 14  relating to Hawaiian home lands.  Section 6 of
the Act states that "the State, while not admitting the validity
of any claims, hereby resolves and satisfies all controversies
and claims encompassed by this Act by: (1) the establishment of
the Hawaiian home lands trust fund and the requirement that the
State make twenty annual deposits of $30 million into the trust
fund."  In addition, Section 7 of the Act states, "Money of the
Hawaiian home lands trust fund shall be expended by the
department as provided by law upon approval by the commission and
shall be used for capital improvements and other purposes
undertaken in furtherance of the Act."  The Governor's Chief of
Staff told us that the DHHL was required to submit an annual
capital improvement projects budget to the Governor for his
approval but, because of the economic downturn in the State's
economy, less funding has been available, which affects not only
the DHHL but other governmental agencies.  He further stated that
he considered the State's settlement of $600 million ($30 million
for 20 years) to the DHHL to be sufficient for capital
improvement projects.

Additionally, DHHL's Administrative Services Officer stated in a
February 3, 2000 letter to the Pacific Office of the Office of
Inspector General that "significant events" had occurred since
the1992 audit, including the $600 million settlement and the
acquisition of additional lands from the Federal and State
governments.  The letter further stated that these events
provided "new development opportunities . . .  to DHHL" and "the
department has enjoyed a reliable, consistent source of funding
[the settlement funds] for which to plan and develop its lands."
Based on these statements, we consider the two recommendations
resolved and implemented, and no further action is required.

Recommendation B.1.  The Commission [should] suspend
implementation of the 10-year plan until (a) a viable needs
assessment has been performed that accurately identifies the
extent of the eligible native Hawaiian population and of its
associated needs and (b) it can be demonstrated that the plan is
financially viable.

The prior audit found that the Commission embarked on a highly
speculative, $2.45 billion 10-year plan to construct 14,000
turn-key housing units, primarily in master-planned communities,
including single-family dwellings, multi-family units, elderly
housing, and rental units.  The 10-year plan was undertaken
because the Commission had made little progress in its
traditional approach of preparing and awarding homestead lots and
providing financial assistance to the beneficiaries.  However,
the 10-year plan was not supported by identified program needs or
based on financial feasibility, and the plan imposed additional
qualifying criteria on beneficiaries for receiving homestead
awards.  As a result, the plan (1) would eliminate from the
program native Hawaiians who may not qualify financially for
mortgage loans and (2) would require families to relocate to less
populated and less economically developed islands to receive
leases.

In our followup review, we found that in a memorandum dated July
6, 1992 to the Assistant Secretary for Policy, Management and
Budget, the Assistant Inspector General for Audits stated that
the recommendation was withdrawn based on the June 4, 1992 letter
from the Commission's Chairman, which stated that there have been
"discussions between staff and the Commission as to the goal of
building 14,000 homes over a 10-year period, but a plan to build
14,000 homes has never been presented to the Commission for its
review and approval."  The Chairman also stated, "We do not view
the goal of building 14,000 housing units over a ten-year period
as a plan for which present and future resources have been
committed."  Since the recommendation was previously withdrawn,
no further action is required.

Recommendation B.2.  The State Attorney General [should]
investigate the preliminary dealings between the Department of
Hawaiian Home Lands and the private investor and developer to
determine whether contracting or other provisions of State law
have been violated.

The prior audit found that the Commission may have violated the
State's development laws by seeking private financing for the
Kawaihae development project.  In our followup review, we found
that in a February 14, 1992 letter to the Office of Inspector
General, the Attorney General stated that the conduct of
Commission officials regarding the Kawaihae development project
had been investigated and  that no violations of State law had
occurred.  Based on this statement, we consider the
recommendation resolved and implemented, and no further action is
required.

Since this report does not contain any recommendations, a
response is not required.

Section 5(a) of the Inspector General Act (5 U.S.C. app. 3)
requires the Office of Inspector General to list this report in
its semiannual report to the Congress.  In addition, the Office
of Inspector General provides audit reports to the Congress. 


cc: Honorable Benjamin T. Cayetano, Governor, State of Hawaii
    Earl I. Anzai, Attorney General, State of Hawaii
    Raymond C. Soon, Chairman, Hawaiian Homes Commission



APPENDIX 


STATUS OF RECOMMENDATIONS AND CORRECTIVE ACTIONS 
FOR AUDIT REPORT "HAWAIIAN HOMES COMMISSION,
OFFICE OF THE SECRETARY" (REPORT NO. 92-I-641)

-----------------------------------------------------------
Recommendations    Status of Recommendations and Corrective
                                                    Actions

    A.1-A.6    Implemented.  No further action is required.

    B.1        Withdrawn.    No further action is required.

    B.2        Implemented.  No further action is required.

-----------------------------------------------------------





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