 talking tax with Tom Yamachika. I'm Jay Fidel. This is Think Tech and it's a given Thursday morning and we are honored to have the state auditor Les Condo with us today. Good morning gentlemen. Morning Jay. Morning. Tom can you bring us current because we've been talking about you know the life and times of the state auditor for a while here and there's been a new development but can you bring us current? Today's title is Proving Management of State Lands Times Two. So give us a handle of what was times one. Okay so as you may know the management of our public lands in the state of Hawaii is done by our Department of Land and Natural Resources. They have something called the Land and Management Division and they put the money that they get from our state lands in this thing called the Special Land and Development Fund. The fund and the operations leading to it was audited by the state auditor in the auditor's report 19-12 which meant that it was done in 2019 and the auditor came out with some very critical findings. I don't want to say the report was it was a bombshell but pretty close and now what we have is a legislative committee that was formed in the House of Representatives to further investigate the matters that the state auditor already investigated and we're very very glad to have this morning with us the state auditor Les Condo who not only authored the report 19-12 which we had been talking about and we had a show on this before but we are now he is now in the midst of these legislative hearings to further investigate the investigation. Thank you for joining us Les. Yeah you could never have enough investigations Les I mean and also it's what's interesting about it is it's the state legislative taking this action it's not even in session it's between sessions it's just interesting you know you think maybe they meet from January to May or so but no no busy busy anyway Les how much of what Tom said you agree with and what would you like add to it? Well I think I agree with everything that Tom said there was there is a House investigative committee that was formed through a House resolution that was introduced and passed on the very last day of session and on its face the resolution is empowering the investigative committee to follow up on the audits of the land the Department of Land and Natural Resources special land and development fund that Tom was describing it also the purpose of this investigative committee on the face of the resolution is also to follow up on our more recent audit of the agribusiness development corporation that we issued at the beginning of this year so that's a 2021 audit I think it's really important that the legislature follow up on the audits because once we issue the audits which both of these audits they include findings meaning we've identified things that we don't think are going so well with these with both of these two two agencies things that really should get improved we make recommendations but at that point our authority our work ends we do follow up to assess whether or not the agency has actually implemented recommendations whether they've tried to address the audit findings but really we don't have any kind of stick or any kind of other authority to force an agency to do take any action so I thought initially that this investigative committee that the house formed at least on its face on the on the you know within the four corners of the resolution that that empowered this committee formed this committee I thought it was really good because I think that it's important that the legislature who has the the stick so to speak that they actually follow up on these audits to help improve these organizations to hold them accountable and to to get them to to do their work better than what they're doing at least the time of the audit so let me let me kind of bring us up to speed on what the first audit found and let me just read you the summary of findings to kind of like give you the flavor of how serious this is without a strategic plan for its public lands the land division's management of leases and revocable permits defaults to maintaining the status quo rather than exploring higher and better use lack of complete and coherent policies and procedures prevents the land division from adequately managing its leases and revocable permits and lack of transparency and accountability hinders the administration of the special land development fund what does all that well I think kind of at a high level just in plain English it means the land division isn't doing its job well enough it's responsible for managing most of the the lands that the state owns and those are lands that are part of the public land trust they include seeded land and and the department the division itself has designated some of those lands identified some of those lands as what they call income producing or revenue producing lands they have a lot of other lands that you know whether they are conservation lands or other types of lands that I don't think anyone really expects to generate much revenue so we didn't look at those lands we focused on the revenue or income producing lands and those are lands that are designated as such by the by the division but we wanted to understand how the department was managing those lands whether they were in essence maximizing the revenue from those lands and instead we found a department or a division that didn't have any kind of strategic plan a long-range plan or an asset management plan so because of that like like you read Tom it was reverting to the status quo so we we included a number of examples in our report so for instance we identified leases in Hilo that were coming up these are 55 year leases and they were starting to to expire come I think the first one was expiring in 2014 and there was an opportunity 70 leases and these were land leases that were initially awarded right after the tsunami in in Hilo and these were vacant land leases and in the 55 years or so they've been improvements that are built on these on these properties in other words their warehouses and other industrial structures that have been built on these properties and under the leases that the improvements it reverts to the state upon the expiration of the lease in other words the state will own those improvements upon the expiration of the lease as these leases came up there was an opportunity for the land division BLNR the Board of Land and Natural Resources to to take advantage of the fact that they could consolidate some of these properties and lease them out now as improved properties in other words they would probably be able to generate more income more revenue because there were improvements on these properties and not just vacant land leases unfortunately the department is was not prepared for this what we called in in in in our report this this event that was was right at the horizon and was going to happen so rather than being able to to take over these properties and and then consolidate them and and then release them provide opportunities to other members of the public to lease state lands what they did is they just ended up extending the leases for another 10 years so instead of being able to generate revenue based upon an improved property they basically are are generating revenue from a land lease in other words a lease that was initially issued without any improvements on it so we identified also some some examples are you are you saying that this lease was entered into 55 years ago as vacant land and then the rent was sent 55 years ago and it was extended at the same at the same price are you kidding me well not not necessarily the same price but based upon an appraisal that is a vacant land appraisal in other words it's not appraising the value of the of the improvements that are now on the property so the department or the division didn't get any kind of premium just because there there are improvements on the property or the fact that they decided not to take over the property so we have an example in our report where one of the lessees one of the tenants on the on on the state lands they were paying about $75,000 a year in annual lease rent to the state and that's based upon the initial vacant land lease and they were not occupying the property they had sub they were sub leasing the property to people they built a warehouse and they were earning about $300,000 in sub lease revenue so in other words just as being almost like the property manager they were they were earning over $200,000 in sub lease revenue so instead of taking over that lease the state extended the lease so it allowed it allowed that tenant to continue to to generate revenue as as being the middle man is being in that sandwich let me let me ask you about something first question is you know you want to you want to get fair rental value so you look around at the value of the property the value of the position so to speak and you find easy to find that the sub tenant is paying 300,000 doesn't that enter into in the commercial world doesn't that enter into the valuation of the property and the position on the property apparently it didn't nobody considered it that's what it sounds like well I think it didn't and I think the reason for that is because it was valued as as just the land now that was the initial lease it was a vacant it was a land lease with nothing on it well let me go to another question I have been you know in the commercial world my recollection is you have a lease which gives the landlord the improvements on the land at the end of it all right and then you renew that lease you let the tenant you know proceed the new rent is based on the land as improved because now the landlord owns the improvements I think this is common practice common concept a common commercial usage you know in the state of Hawaii am I right well that's not how the land division did it and I don't think they didn't follow they didn't follow the common usage in the state of Hawaii then they they looked at it and extended the lease as a vacant land lease just the land and did not value the improvement and that is not consistent with with the way it's done in the business community I think our biggest concern is without any kind of plan they weren't able to prepare for this you know this eventuality it was going to happen and they could have prepared to to allow these leases to expire and do what you're suggesting Tom I mean Jay is to take over these properties with the improvements on it and lease it out to somebody else at a higher value that wasn't done well you know it sounds to me like this is an appropriate examination it's an appropriate issue to examine by the state auditor it's an appropriate reasonable concern that you found an appropriate report recommendation to DLNR and and and to and to the state do you think you did a good job on that audit oh we did a good job we did our job you know we we you know I have I stand behind that audit 110 percent I mean it's it's solid and we did what we were supposed to do and we provided both DLNR as well as the legislature as well as the public with a solid report that has findings that are supported supported by efficient and appropriate audit evidence and now it's for somebody else now to make the improvement to pick up what we did what we found and address it and hopefully that's what this committee is or at least hopefully they will do at some point well in a perfect world what would happen with a report like that what would you expect to happen you know by the state by the legislature after you submit a report like that it would be my hope that the legislature would have a briefing soon after the report was issued so we could explain what we you know what we found answer questions that that the legislature may have and and sit there at the same table with with DLNR the land division and and allow the land division to present its its reasons why they don't do certain things the way that that we think that things should be done now that never happened and I think in the last two and a half or whatever year since that report was issued I don't think there's been much change in the land division's operations and during these hearings I don't hear the land division saying that our findings are off base I don't hear any accusation that the information that we've reported is not accurate the one thing that the land division disagrees with is that we think that for these income producing lands that DLNR land division they have an obligation to amongst other things maximize that revenue you know it's the income the revenue from these lands it goes into the SODF the special land and development fund that that tom was describing and it is the the source of revenue for the land division's operations for the operations of the office of conservation and coastal land management of DLNR it also funds many other DLNR programs the seeded land revenue 20% of that revenue goes to OHA the rest is supposed to fund other other activities under the admissions act so it's it's a very important source of of revenue for the state for the for DLNR more specifically so if you don't generate money then the programs that DLNR can support either they're not going to be as many of them or they're going to not be supported to the extent that they could be supported you know DLNR has and I'm not saying that and I don't think the report says that every land needs to be at that fair market value they're going to be other but it needs to be a consideration there's going to be other considerations like for instance DLNR during these hearings has said one of the properties in Hilo the tenant the lessee is the food basket you know and they think that's a great policy-wise it's good to have lease the land to the food basket at perhaps a reduced rent that's not the other 69 other tenants in that parcel that's one tenant yet that explanation is seems to be what DLNR is using to justify not not looking to maximize revenue and I don't think that that's appropriate or accurate so can you tell us a little bit about what's what is actually now happening in the legislative committee just to kind of bring us up well the legislative committee you know like I mentioned it was formed for the purpose at least in the resolution to follow up on these two audits I think as this the hearings have progressed I think we've had couple weeks of hearings and I understand from yesterday's committee meeting that the chair is intending to have another six or seven days full days of hearings I'm not sure who they're going to call and what they're doing she also has depended over 22,000 pages of documents from these two agencies but for some of the members it appears very clear that they're not focused on the audits or the findings or trying to trying to understand what the two agencies have done to address the findings those those members have focused questions on me and and my office's operations and it sure seems like their purpose is to identify fault with our operations and and hold us you know somehow hold us quote accountable and we are accountable but the the things that they're suggesting that we have not done appropriately really doesn't hold any water I think Tom would understand this because as a CPA we follow the yellow book which is government auditing standards and there's a process in that yellow book and we follow that process and I've explained that process to the committee multiple times and that process starts with a risk assessment to identify what the audit is going to focus on the audit objectives and at the end of the fieldwork phase of our audit it involves a quality control review and we call that independent review by someone in my office so by the time the report is issued we are confident very confident that the information is accurate and supported that independent quality control review it involves somebody that's looking at every sentence we have electronic links at the end of every sentence literally every sentence of that report that that links to supporting evidence so by the time that process is done which takes you know week plus we're very confident in the accuracy of the report but that said we also pass that report to the agency the draft we ask the agency to take a look at that and we have a meeting that we discuss it so if there's any concerns the agency has about the factual foundation of our findings that's the time for them to raise it and we did that process we followed that process yet now we are there are many questions that this committee is asking about the process and I've explained the process to them yet it seems like you know part of their purpose is to try to identify fault with our work and and that is not what I understood this committee to be formed to do it seems like that is outside its purpose and its scope so the committee or some members of it seem to be trying to defend DLNR at your expense is that what you're saying I don't know if it's to defend DLNR or ABC I think it's just more to find fault with my office or our work well what's the connection you know we talked before here about various moves that have been made to find fault with your office is there a connection I don't know I would suspect probably but I don't know I think going back to this committee I've asked the chair just to tell us what are you investigating with respect to my office you know kind of lay your cards on the table let's be transparent about this and as attorneys I think we both all of us we would agree that you know part of due process and and I said any fair process is is to provide notice what what it's going on here what are you investigating let us know and you know that we've gotten the chair has not provided any kind of specific notice to us any any specific areas that that she believes the committee is investigating so you know to me again it's it's just an attempt to find something anything that that would allow the committee to criticize our work so you're thinking that um whether or not the committee comes up with some you know real improvements or suggestions for movement for DLNR they're they're probably going to take a swipe at you as well is that what you're saying um I'm expecting that I do hope that the committee will will um will find ways to help both DLNR as well as ADC I mean that really is the purpose of or at least what I think the purpose of this committee should be those agencies really should be accountable and really need to to kind of step up their game neither of them are performing the way that at least from our perspective they need to perform so it really is my hope that that's what happens I think you know unfortunately what's getting lost here in you know I see in the newspaper today I see in the newspaper yesterday I see earlier reports about the committee and and the tension between the committee and me and my office what's getting lost here is really the reports and the findings in these reports significant findings that really raise really serious concerns at least from my perspective about the operations of both of these agencies so you know I hope that we don't lose sight of the forest kind of thing that this committee will at some point see the big picture and and look at the forest and not these twigs that they seem to be looking at that are on the ground right now that are you know all these broken pieces and trying to you know point at my office or me because these two agencies really really need some some urging to get better and what are the what are the agencies telling you know the committee and and you guys now that they're a hundred percent okay and that everything you found was just it was just wrong what what are they saying I think they're not saying I don't hear either of the two agencies saying that we what we found is wrong in fact I think it's the opposite I think that both of the agencies are saying that they have taken steps to address some of the recommendations um I think the only place where where there's a disagreement or at least with respect to DLNR is what I mentioned earlier I think DLNR does not believe their obligation is for the income producing lands is to generate fair market value or or maximize the the revenue and frankly if they don't and they just continue to extend leases the status quo it really is very unfair it's unfair to the members of the public that might want to lease that land it also subsidizes that business that gets to enjoy state land using state land at a reduced rate so they have a competitive advantage versus any other business that now has to lease commercial land so there's like for example that you mentioned was I think a prime example you have you have a business that has one of these revocable permits they're paying 75,000 to getting 300 so they don't have to do any work and they can skim off 225,000 per year for themselves only and that's you know at least part of that the state should be getting I would agree with that it's not an RP Tom it was a it was a lease uh 55 year lease that got extended for another 10 years but you know hiring a property manager or somebody else at whatever rate I'm sure that would not cost 225,000 a year to do that so the state appears to be losing some significant revenue just on that one property um ADC same thing there there are challenges with ADC the difference there's difference of opinion between us and ADC they're not disputing the findings they're not disputing the facts that are the basis of those findings I think from ADC's perspective ADC's an organization or an agency that was established in 1994 as sugar and pine were closing and it's very clear from the purpose section of the statute that it created ADC that their role was to feel develop these agricultural enterprises that would fill that economic void that was being created by the closure of the of the plantation uh they haven't done that so for the first years they did nothing after that they they acquired the white holy ditch and they became a became a water water system manager and and they acquired some lands on kawai that came to them from the land division came with tenants on it and now they've acquired lands up in wahiwa vacant lands former former plantation lands and they're struggling to get tenant farmers on those lands I think we saw the news report a few a few days ago where there were some fires on on the ADC lands with some burned out cars um junky cars on the lands um anyway they they're not they're not filling that void they don't see themselves as that economic development engine but they're the only state agency that is dedicated to building diversified agriculture right developing agricultural lands and frankly I would have to agree that we haven't been doing that we haven't been developing agricultural lands and our diversified agriculture industry is uh is is undeveloped don't you agree and I think that got highlighted during the pandemic right as tourism fell to zero we didn't have that third leg of our of our economy which in the old days was agriculture uh and and that really highlighted the importance of developing that that third leg of our economy which is what ADC was charged with doing so I don't know if if that ship has already sailed but ADC doesn't see themselves as this economic development engine they see themselves as a ag development organization with these small farmers relatively small farmers which is very consistent with the Department of Agriculture's programs they have these these leases that they issued for farmers as well uh ADC has these superpowers that they're able to operate almost like a private entity you know kind of like high tech development kind of like olohua tower development corporation like nail ha where they're able to do things without having to jump through some of the hoops that other state agencies have to do like they don't have to like DLNR for instance they have to follow chapter 171 which requires them to to put out leases for auction um ADC doesn't have to do that they can direct negotiate with whomever they want to but really their their responsibility wasn't to buy land and develop land it was really to develop this industry to work with private entities so there are things in the statute that they're required to do they're supposed to do an agribusiness development plan they haven't done that and this is you know almost 30 years since they were created they're supposed to do marketing studies those studies are supposed to help these organizations private organizations um you know develop uh figure out what crops they're supposed to to grow to fill that void that that was created with sugar and pines closure they're supposed to do transportation studies so from the sorry ADC's perspective they don't have to do that because the Department of Agriculture does some of that um so those are the the differences I think in in how we read the statute statutory requirements that they're not doing and they don't believe that that they're supposed to do at this point because there's another agency that they believe fills that void so no action has been taken on your audit recommendations that and the legislative committee that was established is not really directed at that uh and this is this is troubling because there's a lot of money you know one factor from what you say Les is um is maybe an embarrassment factor in other words if I have already signed you know 50 60 80 90 leases field and I've given them renewals or whatever um that's done that's a complete uh you know you can't reverse that so if if you in the state order to come in and say well you shouldn't have done that what can they do what can their options be what would you expect uh you know DLNR or the legislature to do to fix that because they've they've already given away the store you know that's really a good question because um you know we I hope if people are interested they go to our website and they read these reports because we have a lot of information in these reports so like for example what you're talking about we have a little text box about sand island business association so the the state lands the deal in our lands on sand island that's the biggest revenue generator for the special land and development fund about 50 of the revenue is from feeba or sand island so what the land division has done and those leases just like a commercial lease it it provides for rent renegotiation every 10 years that's a standard term in a commercial lease and really it's really to protect the landowner if market conditions change and we see that today you know with the increase in the the average costs of of residential residential homes in Hawaii I mean I see that in the headlines uh you know kind of almost every day kind of thing um it's really to protect the landlord should there be a change in the market so that the landlord doesn't get stuck with in a situation where they're getting below market rent what deal in our did land division is they agreed with feeba to renegotiate um the the rent for a period that's more than 30 years so the the rent has been renegotiating the greed through all the way through 2057 so to your point it's locked in but I think our point is that they need to have a strategic plan they need to develop some some long-range planning so that they don't fall into these situations these 10-year extensions are going to expire relatively soon so deal in our needs to have a plan as to what they're going to do with these properties as these leases expire and they just don't do status quo oh they don't have a plan and following the report which was like two and a half years ago they haven't developed the plan now the legislature is asking you questions about how you made these recommendations but it's not asking questions about how deal in our is going to make a plan am i right yeah that's pretty accurate well tom this is a very interesting discussion um you know can you um can you summarize where we are on this uh and um you know can you find out more I mean I guess I guess the question I would leave you with less is is what's really happening here can you talk about it I don't know what the underlying motivation is I think I said that earlier jay I do know what's happening is this investigative committee they don't appear to be um within the scope of the the resolution itself the purpose and the scope of why they were why they were created or established it sure seems and the committee chair is actually admitted that part of their investigation is about my office and you know I we've we've gone through that before with the with the auditor working group that the speaker had formed I think we talked about that during another session but it seems like it's a continuation of that and I don't know why oh couldn't couldn't you have a a call or a meeting with the chair of this committee um and ask um I've had I've tried to do that with the speaker and other legislators and it has not been successful obviously uh so I don't know what the motivation is and why it continues um but I do know it's it's not right I mean my employees and and it's we're under threat of being subpoenaed not only our documents but also our our attendance or participation in some of these hearings and it's under threat of criminal contempt and yet on the other side of that that uh demand that we appear and we talk uh as I've repeatedly told the committee we have a confidentiality statute or provision in our statute 23-9.5 that prohibits or allows the auditor uh work papers are not are confidential so the auditor shall not be required to disclose work papers that's what the statute says the state ethics code also prohibits an employee from disclosing information that's public so we have two provisions in our statute that that clearly protect the information and we give assurances to oddities as we go into audits beginning middle end that the information is confidential so because of that I think that we we give um we we get more information you know more more true information that that it's unfiltered from people when they talk to us uh and and we're gonna you know basically walk the talk on this because we give those assurances we're going to protect those work papers and there's no reason why the committee needs to get into our work papers except if they're trying to find fault with our work you know and that's the part that is really not not right it's not appropriate what this committee is doing appears to be beyond the scope and the purpose for which it was established um you want to opine or summarize and close the show sure so where we are at this point is uh we we have a legislative committee doing something uh we're not really sure what they're doing at this point um they are gathering information and um maybe kind of the next logical step for for us on this show is to get the committees you put in what they're doing and why but but for right now it's a work in process we already have the state auditors recommendation report reasons for concrete examples and all of the things that you know less referred to so we want to I think all of us want to make sure that that our government is a more efficient and effective and uh is maximizing the use of the the dollars that we all feed it with our tax money and uh but this this is now a work in process and uh we'll we'll need to see what the next chapter looks like yeah yeah I mean this is a matter of some concern because we're in a time when the state needs money desperately and the state is leaving it on the table and it doesn't sound like any progress is being made uh to develop a plan uh to um you know get in the commercial world what a a trustee with fiduciary obligation would get and you know I remember we talked about this before but um DLNR is holds these lands in trust and therefore presumably has the fiduciary obligations of a trustee and that's essentially what we're talking about here well thank you thank you very much uh less great to have you on the show again we will follow this issue going forward um thank you very much you guys really appreciate the discussion