The Financial Position Task Force F&R 010318

Posted on Dec 29, 2017 in Main

STATE OF HAWAII
HAWAII COMMUNITY DEVELOPMENT AUTHORITY
Honolulu, Hawaii 96813

January 3, 2018

Chairperson and Members
Hawaii Community Development Authority
State of Hawaii
Honolulu, Hawaii

HCDA Board Members:

SUBJECT:    Shall the Authority Adopt the Findings and Recommendations of the Financial Position Task Force for Goals Two and Three?

SUMMARY:

The Financial Position Task Force (Task Force) identified four incremental goals to fulfill its scope of work at the June 7, 2017 HCDA General Meeting.  Of its four goals, the task force is presenting its findings and recommendations for goals two and three for board decision-making as follows:

Goal 2 – Maintain legislative funding for HCDA staff positions.

Findings:

  1. Act 124, of the 2016 Legislative Session, changed the funding for 19 of HCDA’s 23 staff positions, from general obligation bond funded capital improvement project (CIP) positions, to general funded capital improvement project positions.
  2. Pursuant to Act 49, of the 2017 Legislative Session, 19 of HCDA’s 23 will be required to be paid from the Hawaii Community Development Revolving Fund (HCDRF), effective July 1, 2018.
  3. HCDRF revenues and current cash balances are inadequate to sustain HCDA operations and fund HCDA staff positions.

Recommendations:

  1. Submit a supplemental budget request for the 2018 Legislative Session to restore funding for 19 of HCDA’s 23 staff positions.
  2. Reach out to Legislators and other key budget decision-makers and staff on the financial position of the HCDA and limitations of the HCDRF.

Goal 3 – Evaluate opportunities to enhance revenues generated by HCDA properties.

Findings:

  1. Prudent management of HCDA’s portfolio is critical to sustain operations and the success of HCDA’s mission.
  2. Nominal leases, public facilities, and underdeveloped properties must be balanced by revenue generating properties.

Recommendations:

  1. Develop and implement policies to ensure the prudent management of HCDA properties that balances revenue generation with HCDA’s mission.
  2. Implement recommendations contained in the HCDA Portfolio Optimization Analysis prepared by Colliers International (Colliers Report, Attachment 2) on page 61 to capitalize on opportunities in the near-term.

AUTHORITY:

Permitted interactions of a group of board members is governed by Hawaii Revised Statutes (HRS) § 92-2.5(b) which states that two or more members of a board, but less than the number of members which would constitute a quorum may be assigned to:

  1. Investigate a matter relating to the official business of their board, provided that:
  1. The scope of the investigation and the scope of each members authority are defined at a meeting of the board;
  2. All resulting findings and recommendations are presented to the board at a meeting of the board; and
  3. Deliberation and decision-making on the matter investigated, if any, occurs only at a duly noticed meeting of the board held subsequent to the meeting at which the findings and recommendations of the investigation were presented to the board.

The task force was formed at the May 3, 2017 meeting to evaluate the financial position of the HCDA and the potential of further revenue generation.

The findings and recommendations contained herein, were previously presented at the Authority’s December 6, 2017 meeting and therefore may be adopted at this meeting.

BACKGROUND:

The task force was formed at the May 3, 2017 meeting and include members, Mary Pat Waterhouse (task force chair), Wei Fang, Michael Golojuch, Sr., and Shirley Swinney. Member Jason Okuhama was later added to the task force at the June 7, 2017 meeting.

In its update to the Authority on June 7, 2017, Member Waterhouse on behalf of the task force identified the following incremental goals towards achieving the scope of work it was assigned in May.

  • Goal 1 – Establish a framework for forecasting future resource needs and deploying current resources;
  • Goal 2 – Maintain legislative funding for HCDA staff positions;
  • Goal 3 – Evaluate opportunities to enhance revenues generated by HCDA properties; and
  • Goal 4 – Consider containment of current costs and liabilities.

Relative to Goal 1, the task force presented its findings and recommendations at the July 5, 2017 General Meeting. These findings and recommendations were subsequently adopted at the September 6, 2017 General Meeting.

In association with Goal 3, the task force received board approval at the July 5, 2017 meeting to engage a consultant to evaluate HCDA’s portfolio of assets. Colliers International was selected to perform the analysis and a copy of their report is included as Attachment 2.

GOAL 2: MAINTAIN LEGISLATIVE FUNDING FOR HCDA STAFF POSITIONS

FINDINGS:

Finding 1 – Act 124, of the 2016 Legislative Session, changed funding for 19 of HCDA’s 23 staff positions, from general obligation bond funded CIP positions, to general funded capital improvement project positions.

  1. The change in funding was due to increased scrutiny and oversight of the expenditure of tax-exempt bond proceeds as the HCDA has not been as active in the development of public facilities as it was in the past.
  2. HCDA staff positions were transferred, from the general obligation bond pool, which has more available capital, to the general fund, which has very limited funding.

Finding 2 – Pursuant to Act 49, of the 2017 Legislative Session, 19 of HCDA’s 23 will be required to be paid from the HCDRF, effective July 1, 2018.

  1. Section 3(A)(24) of Act 49 allocates $1,450,000 of revolving funds in fiscal year 2019 for the payment of the 19 staff positions.
  2. Section 7(3) of Act 49 reads, “During fiscal year 2017-2018, the Hawaii community development authority shall plan for and take any action necessary to accommodate the change in means of financing for the 19.00 permanent positions from general funds to revolving funds commencing fiscal year 2018-2019.”
  3. With the addition of fringe and scheduled collective bargaining increases, funding for the 19 staff positions is approximately $2,550,000 per year and would have to be funded by revenues generated by HCDRF revenues and assets.

Finding 3 – HCDRF revenues and current cash balances are inadequate to sustain HCDA operations and fund HCDA staff positions.

  1. Since the transfer of Kakaako Makai property to OHA to settle the State’s past due ceded land payment, the income from HCDA properties has been insufficient to cover recurring operating expenses, losing over $2,000,000 in annual rental income.
  2. Over 75% of the HCDA’s cash balance is restricted based on the programs from which this funding is derived, see balances and restrictions on Attachment 1.
  3. HCDA programs and fees are not adequate to sustain operations and using them to pay salaries would leave little (if any) for their intended use as these programs were not designed to cover staff costs, see a description of revenues on Attachment 1.
  4. Funding the 19 staff positions from the HCDRF would increase expenses by approximately, $2,550,000 per year.

RECOMMENDATIONS:

Recommendation 1 – Submit a supplemental budget request for the 2018 Legislative Session to restore funding for 19 of HCDA’s 23 staff positions. While the HCDA’s 19 staff positions were classified as temporary positions when funded as CIP, the general funding request should reflect the 19 positions as permanent position.

Funding the staff salaries from the HCDRF is detrimental to the sustainability of the fund and utilize funding otherwise intended for direct investment in HCDA community development districts as contemplated in the development of HCDA’s programs. Until the HCDA can bolster its unrestricted revenue sources, funding for HCDA staff position requires support from the Legislature.

Recommedation 2 – Reach out to Legislators and other key budget decision-makers and staff on the financial position of the HCDA and limitations of the HCDRF.

As indicated in Attachment 1, while the HCDA has approximately $27,000,000 in its revolving fund over 75% of it is otherwise intended for other uses, as codified in statute or administrative rules. These funds have also accumulated quickly only over the past 5 years as a result of the market cycle in Kakaako which has slowed significantly.

If it is the Legislature’s intent to have the HCDRF fund the staff positions, the HCDA would require additional unrestricted sources of revenues (e.g. rental income from land, tax allocation, etc.).

GOAL 3 – EVALUATE OPPORTUNITIES TO ENHANCE REVENUES GENERATED BY HCDA PROPERTIES

FINDINGS:

Finding 1 – HCDA operations rely heavily on revenues generated by its properties.

  1. Revenues generated thru HCDA leasing and management activities as other HCDA revenues streams have restrictions on use and cannot be used to fund operations.
  2. Each year approximately $1,375,000 of leasing and management revenues is budgeted for the general and administrative operations of the HCDA, such as office space, office equipment, and the salary of four full-time staff positions that is necessary for administering HCDA’s three community development districts.
  3. Revenues from leasing and management activities must also be reinvested in the properties from which they are derived in the form of maintenance, capital improvements, and property management.
  4. HCDA’s mission also requires the development public facilities such as parks and roads; the maintenance of these public facilities are also partially paid from HCDA leasing and management activities.
  5. The formulation and maintenance of community development plans and rules is a core function of the HCDA by statute; the process is costly and onerous, and is also funded by leasing and management revenues.

Finding 2 – Nominal leases, public facilities, and underdeveloped properties must be balanced by revenue generating properties.

  1. After the loss of makai property to OHA, HCDA’s property portfolio is unbalanced with an emphasis on undeveloped land, public facilities and nominal leases; having lost developed properties that yield better cash flow.
  2. The HCDA also regularly receives inquiries for increased public facilities and nominal leases for its properties.
  3. The HCDA lacks policies to guide its decisions its leasing and management activities to ensure the sustainability of HCDA operations.
  4.  

RECOMMENDATIONS:

Recommendation 1 – Develop and implement policies to ensure the prudent management of HCDA properties that balances revenue generation with HCDA’s mission.

As an essential component to sustaining HCDA operations policies should be implemented to guide real estate decisions. The policy should recognize the HCDA’s unique mission and include considerations towards mitigating long-term exposure to below-market leases and public facility maintenance costs.

The proposed guidelines could be captured in an overall leasing policy with individual sections that specifically address areas such as:

  • Solicitation of property for lease;
  • Process for unsolicited proposals;
  • Establishing market rent;
  • Due diligence requirements for leasing decisions;
  • Evaluating below-market lease proposals; and
  • General lease terms and conditions.

The task force recommends that the board direct staff to develop policies for review and approval by the Board at a subsequent date.

Recommendation 2 – Implement recommendations contained in the Colliers Report on page 61, to capitalize on opportunities in the near-term.

In evaluating the revenue generation of HCDA’s assets, the Colliers Report, included as Attachment 2, identified a number of near-term opportunities that could be pursued to generate more revenues. While the report also identifies other mid- and long-term solutions the report is based on current conditions, which may not represent an optimal opportunity for the future.  These mid- and long-term opportunities are helpful in informing any current or near-term decisions on these assets (e.g. maintenance, investments) as well as long-term planning.

Implementing the near-term opportunities would yield benefits in the near-term and therefore should be pursued. The task force recommends that staff would be best positioned to recommend the timing and approach to implement these opportunities.  As these opportunities would require long-term leases and capital improvements, any final action would still require board approval.

Attachment 1 – Summary of HCDA Revolving Funds and Subaccounts

Attachment 2 – HCDA Portfolio Optimization Analysis