Aå#H-ffiN þ4L_iHN',""H- l$rn_,clYü_) qs{ ]åFdffi L"AV\IYIHFES; A IAW TORPORAIION September 23,20L6 c}Af-lrJ rilFËl(Li: l001. 13ishop 5treel lìuilc lUO0 l-ionolulu, l'l I 968l-3 [3I{i I5t",4tl D 0ËFIC[: 26 "2.lU l'iar¡v¿i'i ì3e11 lloacl l-lito, l'1196720 l'vi /\{.J I l} i: F i {- fi The Honorable Kirk Caldwell Mayor, City & County of Honolulu Honolulu Hale Honolulu, Hawai'i 96813 : 2200 Maín Street 5r: itr,: 521, Re: Misuse of Funds Related to Haunama Bay \M¿iLuku, l4l 9679?) Dear Mayor Caldwell Phone: (BoB) 524.-1Boo Fax: (soa) 524-459r wl¡rul. ¡:r [rf i, cn nr PAUr Åå-sïtru Phone: (808) 524-188¡J Fax: (B0B) 5?-4 -4.':9 l. [-mail: FAlston G)ahJ'i.com Our firm and the law firm of Carlsmith Ball represent the Friends of Hanauma Bay (FOHB) and are writing because there is an urgent need for the City & County to correct the continuing misuse of admission fees paid by visitors to Hanauma Bay. The simple reality is that the City has intentionally, and persistently, misused these funds in violation of court rulings. The situation is intolerable. lt cannot continue. ln 1996, the City Council adopted a billthat became Ordinance 96-L9. lt established a specialfund for Hanauma Bay. The Hanauma Bay Nature Preserve Fund (the "Fund")-which was to be created using admission fees paid by visitors-was mandated to be used for the following purposes in order of priority: (L) First, forthe operation, maintenance and improvement of the Hanauma Bay Nature Preserve; (2) Second, for educational and orientation programs for visitors to the preserve; (3) Third, for carrying capacity study of the preserve and for other studies relating to the environmental condition of the preserve; and 970872v1 The Honorable Kirk Caldwell September 23,2016 Page 2 (4) Fourth, if funds are available, forthe operation, maintenance and improvement of the following park facilities: Koko Head District Park, Maunalua Bay Beach Park, Koko Head Rifle Range, and the Koko Crater Botanical Garden. ln Novemb er 2002, the United States District Court for the District of Hawai'i determined that Clause 4 should be stricken from Ordinance 96-l-9, and that "... any surplus funds for a particular year shall remain in the Hanauma Bay Fund to offset deficits in expenditures for Hanauma Bay in future years." The District Court also determined that the appropriate remedy for the past misuse of the funds collected would be to "... return the portion of the Hanauma Bay Fund spent on the nonHanauma Bay parks to the Fund for future use in operating, maintaining, and preserving Hanauma Bay." Judge Alan C. Kay determined that the amount to be refunded to the Fund was S3,166,588.04, ln October z}O4,the United States Court of Appeals forthe Ninth Circuit affirmed the 2002 decision. Despite these rulings, the City has continued to misuse the funds collected from visitors to the Bay. Based on the City's own expenditure reports, our client, FOHB, has found the Fund has been, and is being, misused. Specifically, the City has used the Fund for the following illegal purposes: (1) The purchase of vehicles for Ocean Safety for use at adjacent parks (FY20Q$ = $25,929 and Fy2009 = 93t,703); (2) Compensation for the time employees assigned full time to Hanauma Bay spend working on tasks supporting adjacent parks from FY2004 - FY2016. Actual figures cannot be determined without an independent audit. City Administration and Department of Parks and Recreation (DPR) personnel have falsely claimed that it is too difficult to apportion the time employees assigned to Hanauma Bay spend on adjacent parks to another account, so they continue to charge the Fund for their full salaries; (3) Compensation to personnel who work full time at adjacent parks from FY2004 - FY2016. Actual figures cannot be determined without an independent audit. Based on the City's financial reports, the FOHB estimates the amount for FY201-4-15 alone ¡s 5323,625; (4) Paying for refuse collection from adjacent parks from FY2004 - FY2OI6. Actual figures cannot be determined without an independent audit; and 970872v1 The Honorable Kirk Caldwell September 23,2016 Page 3 (5) Paying for upkeep, maintenance and supplies for comfort stations at adjacent parks from FY2004 - FY2OL6. Actualfigures cannot be determined without an independent audit. Further, FOHB's investigation has revealed that City Administrations have mismanaged the Fund by: (1-) Overcharging principal and interest on General Obligation Bonds (GOBs) apportioned to the Fund from FY2004 - FY20!5 by $1,084,899.00; (2) Paying for infrastructure maintenance and repairs at Hanauma Bay in 20L0,2011, and 201-3 through GOBs instead of with the operating budget, although there was enough money in the Fund to pay for those maintenance and repair tasks; (3) Varying the federally determined follows: FISCAL YEAR FICA tax paid out of the Fund from FY2008 - FY2014 .CHARGED % as ACTUAL % 2008 5.57 7.65 2009 5.97 7.65 2010 4.33 7.65 20Lt 3.84 5.65 2012 2.1,L s.65 2013 8.6s 7.65 2014 8.19 7.65 (4) Diverting interest accrued by the Fund into the General Fund from FY2004 - FYZOL4. The investigation by the FOHB indicates that the interest diverted from the Fund from FY2004- 1Y1OI4 is over 5600,000, but actual amount cannot be determined without an independent audit; 970872v1 The Honorable Kirk Caldwell September 23,2016 Page 4 (5) Charging the Fund a fluctuating percentage for Central Administrative Services Expenses (CASE)from FY2011 - FY2015: FISCAL YEAR cAsE % 201,L 2.8% 2012 8.4% 2013 L.O% 2014 1.5.6% 2015 91% (6) lncreasingthe annual inter-fund transferfrom the Fund to DPR by 52%fromlYlOOT FY2013, with substantial fluctuations from year to year, without clear indicators of the reasons for this increase; and (7) Diverting the rental income from the caretaker's house at Hanauma Fund instead of depositing it in the Fund. Bay to the General Armed with financial data obtained from the City, the FOHB has tirelessly advocated with DPR, BFS, the City Council, the City's Managing Director, and the Mayor to have the City, among other things; (L) Comply with the 2OO2 and 2004 Federal Court Orders to use the Fund only for Hanauma Bay and not adjacent parks; (2) Conductanindependentfinancial auditoftheFundfromFY2002-Present,toincludean analysis of the City's management of its f¡duciary responsibilities to the Fund. The only audit of the Fund was an operational audit conducted in 2OO7 . One of the findings in the City Auditor's report highlighted in the Executive Summary states, "Although the priorities of use of the preserve's funds are specified, there is no coordinated effort to identify, assess and evaluate expenditures needed to ensure the preserve's objectives are met." (p. Z). The same report found "The Department of Parks and Recreation needs to improve its planning efforts to properly meet the needs of the preserve. Proper planning for the maintenance, operations and improvements to the preserve ensures that the preserve operations and park facilities are meeting the needs of Hanauma Bay and its unique character. The preserve is not only valued as a recreational beach but a significant and protected nature resource area." (p.30) 970872v1 The Honorable Kirk Caldwell September 23,2016 Page 5 (3) Repay the Fund for all the unconstitutional expenditures, diversion of interest, and questionable financial management practices (i.e., variance in FICA tax and CASE charges) since FY2004; (4) Establish the Fund as a separate fiscal entity from DPR's operating and CIP budgets to increase transparency of the Fund's management and to stop chronic underfunding of the Bay's requirements; and (5) Spend money from the Fund on timely infrastructure maintenance/repair and improvements to the Bay, as well as on the mandated carrying capacity studies ln the past, FOHB has some limited success in its efforts to convince the City to comply with the 2002 and 2004 Federal Court Orders and its own Ordinance in the following areas: (1) ln July 20L5, the City Council passed Ordinance 15-5 specifying that interest earned on deposits in the Fund will remain in the Fund. So, for the first time since 1996, the Fund is being allowed to retain the interest it earns on deposits. ln 2015, the City paid the Fund S1,000 in interest, yet the FOHB estimates that the City has diverted at least S5O,OOO in interest from the Fund each year from FY2004 - 1Y1OL4. However, the City refuses to repay the interest earned in the previous LL years to the Fund; (2) lnFY20l5,theCityconductedatrue-upoftheinterestchargedtotheFundforGOBs, crediting the Fund w¡th $1,087,000.00 in over charges since 2002. lt further pledged that expenditures should match debt service payments going forward. However, the City refuses to repay the Fund interest for this overcharge to the Fund for L3 years. (3) tn tY2Ot6,the City pledged to stop paying employees assigned fulltime outside Hanauma Bay from the Fund. To date, that pledge has not been honored. The City refuses to repay the Fund for illegally compensating these employees from the Fund for 12 years. ( ) ln FY2OL6, the City agreed to start depositing the rental money from the Hanauma Bay caretaker's house into the Fund, but refuses to repay the Fund for rental income from previous years. As if these problems were not bad enough, the City has disregarded the terms of the Conservation District Use Permit regarding the management of Hanauma Bay Nature Preserve. 970872u1 The Honorable Kirk Caldwell September 23,2016 Page 6 The Board of Land and Natural Resources approved the application for this permit in 200L subject to L9 conditions. One of these conditions is that the City "...will contract for the continuation of the carrying capacity study and submit a yearly update of baseline data to the board." (p. 2). The carrying capacity studies measure the effect human interaction has on the reef ecosystem at Hanauma Bay. Since the Bay is impacted by almost a million visitors every year, the results of these studies inform management decisions critical to the conservation protocols at Hanauma Bay. Despite the 2002 and 2004 Federal Court rulings specifying that the Fund is to be used for carrying capacity studies, the State's mandate that annual updates be conducted as a condition of building the Visitors' Center, and Resolution 96 - 19 specifying that the Fund will be used for carrying capacity studies, no carrying capacity studies have been conducted since the 2000 baseline study. ln 2007, the City's Auditor conducted an audit of the Fund (Report No. 07-02 - Hanauma Bay Fund dated March 26,2008). lt reported that, "Elements identified in the carrying capacity study of 2000 have yet to be formally incorporated into planning efforts. This study, called for in the required expense from the fund, provides valuable data for parks department officials "...and should be part of the parks department's strategies in assessing projected needs and developing financial requirements to sustain the preserve." To date, the results of the 2000 baseline - and only - carrying capacity study of Hanauma Bay have still not been incorporated into any planning efforts bythe City. Further, although the City encumbered money in FY2015 to conduct the first carrying capacity study since the 2000 baseline study, the new study has not commenced yet (as of August 201'61, and we are not confident that the City will continue these studies despite DLNR's requirement to do so based on their June L4, 2016 letter to DLNR. Our client demands the City agree immediately to audit the finances of the Hanauma Bay Nature Preserve Fund from 2004 to present. Any and all misused funds are to be repaid to the Fund with interest based on that being paid on the GOBs. lt is also necessary that the City agree to an independent annual audit of the Fund forthe next ten years to insure compliance with the Courts' orders. 970872v1 The Honorable Kirk Caldwell September 23,2016 Page 7 We need an affirmative response no later than October L0. lf we do not have an affirmative response by that deadline, we will pursue steps to enforce the earlier Court orders. We hope th ill not be necessary. ery ly yours, /Ø.íÞ"4ø** P UL ALSTON MICHAEL PURPURA Of Carlsmith Ball LLP PA:rjkp 970872v1