 Aloha, and welcome to Business in Hawaii with Reg Baker. We show the broadcasts every Thursday from 2 to 2.30 from the very high tech studios of Think Tech Hawaii in downtown Hololulu in the Pioneer Plaza. We focus on positive stories of businesses in Hawaii and their owners who have made it successful here. There's always challenges, but somehow a lot of people seem to get around those challenges and are successful. We also on the show invite guests to come in and talk a little bit about what they do to help support these efforts in helping businesses be successful in Hawaii. And today we've got a familiar face, Tom Yamachiga from the tax foundation is here. We're going to be talking a little bit about taxes and rail and tax reform and special sessions, but Tom, he's been here many times and welcome back to the show. Thanks for having me on. Tom, I guess you've been a busy guy here recently. I seem to see your name popping up in different places, you know, named in your initiating some legal action against people, I guess the rail and some other stuff. Can you give us a quick briefing some of the things that you're working on? Well, let me talk a little bit about like the rail suit that you talked about. We brought a court action against the state of Hawaii regarding, you know, part of the rail search and I say part because you know how we in Honolulu have to pay the half percent. Right, that's how the GET is. So the GET is four and then we add half a percent to that to help pay for the rail. Right. So everybody thinks half of that half percent is going to go to rail actually only 90 percent goes to rail. Ten percent is kept by the state, goes into general fund, do not pass, go do not collect $100, nobody knows where it goes, but it doesn't go to rail. Oh, so that's part of their slush fund. Well, that's kind of what we've been saying and that's why we think there's a constitutional problem there. We brought suit to have the court sorted out because I think when you look at it, that part of the tax is only assessed against Honolulu residents, businesses, customers and yet it's feeding $25 million a year to the state general fund. So something's wrong. So that $25 million could actually be used anywhere in the state, not just on Oahu where the money came from. That's right. Interesting. Can and probably is. And is. Yes. So what is the status of that suit? Are you making any progress on it? In the beginning of last month, the beginning of July, we had oral argument before the Supreme Court of Hawaii and we were actually very thrilled that they agreed to take the case and the foundation's attorney and the state's attorney presented their arguments and the Supreme Court now has it under submission. And we're expecting a decision to pop out from them could be any day now. Really? So this is something we might be hearing about soon? It's possible, yes. All right. Well, we'll keep our fingers crossed. Any indications as to how they might rule on this? It's just speculation at this point. We're keeping our fingers crossed. We are. We're hoping that this will be done. And what are we hoping for? If they did make a ruling that was considered favorable, it would, what, focus those funds to just Oahu or eliminate them? Basically, what we're asking is that the illegally diverted funds be returned to the city so that they can pay for rail like we thought they were going to do in the first place. I see. So is the city kind of supporting this effort then? Not at all. Not at all. I mean, you have to realize that when the city was negotiating this deal, they were basically presented with, okay, do you want the surcharge or don't you? And if you do, this is how much it's going to cost you. So it's really not in the city's interest to repudiate the deal. But it's not the city's money. It's taxpayer's money. That's true. You know, governments don't pay taxes. People pay taxes. That's right. So that's why we in the foundation have, as a taxpayer advocacy or watchdog group, we've tried to take it at least to a level where it can be discussed by people in the court system who have the authority to make some judgments about, you know, whether this is in fact constitutional or not, and whether it is unfair or not. Fairness is a whole other issue. But does this, how does this play into the special session that's coming up, if at all? I mean, if we were to be successful at this, and the money all did revert back and had to be refunded, because this has been going on now for quite a number of years. That's correct. The special session, of course, is slated for the end of this month, and they're supposed to figure out a way to shore up funding for real through some mix of GE tax, maybe the transient accommodations tax, because that was brought up by the House, and maybe real property tax, because if number one and number two doesn't work, then the city has to fend for its own devices, and what they have is the property tax. That's always their fallback. That's always their fallback, because that's basically the lever they have. Now, let me ask a kind of a loaded question, but you're a CPA, right? I'm not a CPA, but you're an attorney. I'm an attorney. So you've got an eye for numbers. I mean, you've been doing tax work for a while. Do we know how much we need to fund this thing? I mean, we're asking for more money. We're going back to the special session. We're asking for additional funding and all that. But every time we seem to think we know what the number is, it keeps changing. Is there any definitive number that you've seen that has come out that we know how much we need? No. And as a matter of fact, I think the same question was put to the heart CFO. And he said, I don't know. I mean, if the heart CFO doesn't know, I mean, how can somebody like me know? Yeah. No, that's disconcerning a little bit. And so we're asking for additional funding, possibly more taxes, maybe taxes in different areas, but we're not quite sure how much we really need. Yeah. Certainly they have plans and estimates. But I think what they found is that when they went out to bid and the bids came back, the bids were higher than what they were hoping for. Well, and some of the estimates that they have come and offered to the public in the past is all proven to be lower than what they are now. They haven't been able to hit that mark. Not even once yet. One interesting bit of information that I learned was that there's a lot of power requirements, electrical requirements, to run the rail, particularly at the substations that they're building. And so they went out and started doing the pilings and they started building the substations. And it was very late in that game before they even reached out to the Hawaiian Electric Company, asking them to get involved to start working out the plans on how to bring the power. And they found out that there weren't the capabilities there. And so now he goes going back trying to figure out how to cover the costs of bringing the power that they need to the stations to run the train and the substations. And that's all part of these additional costs because of the poor planning that was done right up front. And I believe also there was an issue that Hiko was saying, look, we need more clearance between the rails and these power lines than was provided for in the plans. So you've got to change your plans. And Hart's going, what? It's amazing. Anyways, there was a suggestion that we do a... Some people are calling it a forensic audit. I'm not sure that that's the best word or description of what it is, but an efficiency audit or something to look at what has happened in the past, what are some of the balls that were dropped and maybe the estimates that were missed to see and identify where those problems are to make sure that they don't happen again. Now, otherwise history tends to repeat itself. Some of the people on the board didn't think that was necessary. They don't want to, I think one person said, muck it up. Muck around in the past. That was one of the most unbelievably stupid comments I have heard in a long time from Hart. What's your thoughts about that? I think when you have systematic cost overruns like what we've been having, you really need to understand why this is going on. And when you understand why this is going on, then I think you'll be in a better position to come up with a viable recovery plan. If you don't know why you put a recovery plan together, it'll probably fail. Well, and it fails because you don't know what the mistakes were made in the first place. Right. Or there's some root cause that you have not been addressing. And guess what? It pops up again because you haven't dealt with it. So what we've been saying at the foundation and some other people have been doing with the petition drives and so on is we need to that review. We need to have somebody tell us what happened, what were the mistakes so we can learn from them and figure it out. Now, I guess what the internal people in Hart were saying was, well, we know what the mistakes are. But if that's the case, then why do they keep happening? Exactly. I was just going to ask that question. Yes, if we know what the mistakes are, how do we know with any assurance that they're not continuing to happen? I mean, we need to bring some light to this process and some objectivity. I mean, sometimes, from my experience, if you're part of the management that created a mess in the first place, sometimes you really don't want a lot of people to see what was going on and you want to try to fix it yourself. But maybe you're just not seeing it as clearly as others from the outside can see it. And that's one of the reasons why the SEC and a lot of other federal agencies require independent third-party reviews or audits because they do need to be objective and not be looking at things through rose-colored glasses and put a positive spin on it. Let's just clean this up, let's fix what's broken, make sure it doesn't happen again and move forward. Yeah, and one thing that you did say kind of just triggered a thought in my mind, you mentioned the SEC. One thing that people need to realize is they've just issued bonds. When you issue bonds, you go to the market, SEC now has requirements. And so if you have financial statements that are materially misleading or that don't state material facts, you have problems. We've got big problem. We've got to go on a short break, but let's come back to this right after the break because this can be significant. This is Business in Hawaii with Reg Baker. I'm here today talking with Tom Yamachika from the Tax Foundation. We're covering a variety of topics, but we seem to be stuck on the rail right now. And so we're going to talk a little bit more right after the break about some of the issues related to the bonds that are going to be issued by heart. So we'll be right back in about one minute. I'm going to the game and it's going to be great. Early arriving for a little tailgate. I usually drink but won't be drinking today because I'm the designated driver and that's okay. It's nice to be the guy that keeps his friends in line, keeps them from drinking too much so we can have a great time. A little responsibility can go a long way because it's all about having fun on game day. My name is Steven Philip Katz. I'm a licensed marriage and family therapist and I'm the host of Shrink RAP Hawaii where I talk to other shrinks. Did you ever want to get your head shrunk? Well this is the best place to come to pick one. I've been doing this. We must have 60 shows with a whole bunch of shrinks that you can look at. I'm here on Tuesdays at three o'clock every other Tuesday. I hope you are too. Aloha. This is Think Tech Hawaii raising public awareness. Aloha and welcome back to Business in Hawaii with Reg Baker. Today we're here with Tom Yamachika from the Tax Foundation and we're talking about the rail issue and some other tax issues that's going to be coming up here soon. Tom we were just getting into the issuance of bonds. Is it heart or is it the state that's going to be issuing these bonds or do we know? I think there'd be the city. Okay the city and county is going to be issuing them on behalf of heart to fund the rail. Right because I think it was a city council resolution or something that... Now once they issue the bonds and I'm assuming there's going to be tens of millions of dollars of bonds being sold. Yes then a whole different set of laws can be applied to the picture, namely the securities laws. They protect people who invest in the stock market and the bond market. The long and short of it is if there is inaccurate or misleading or false information in the financials that the city or heart is using to go out and sell those bonds then the SEC, Security Exchange Commission can get involved, do civil fines and they put people in jail. And they've got a pretty big stick and they take their job very seriously and I've been involved in the past in some public companies and a lot of the officers in those companies have to sign and be in compliance with different elements of the law relating to securities transactions. And the compliance issues don't necessarily just evolve around say the financial statements. It's also the narratives that are associated with those financial statements. So if there are components of the financial statements whether it be an executive summary or footnote disclosures or whatever all of that is under the purview of the Securities Exchange Commission. Yeah and there was an actual case that just recently gut concluded where there was a city in or municipality in New York state that had gone out and issued bonds to build a stadium. The voters didn't want it but they wanted to go out anyway so they did. And it turns out that you know there was some cooking the books involved and as a result of that the supervisor you know very equivalent of our city council person got convicted on 20 felony counts. Wow. Meal fraud, wire fraud, securities violation. This is an elected official that didn't really have direct responsibility for they had other people over there that was running this as well. So he was kind of an overseer. That's right. Wow. And so he's going to be sentenced in September and he's probably going to be facing time. Well you know some of the silliness that's been going on over there at ART then and maybe even at the city council better you know they need to take a look at it to make sure that they're squeaky clean once these bonds get issued. Yeah they better be taking their craft very seriously. Very good. You know they've got a lot more to do. I guess you know some of the issues over there is not going to go away soon. You know we've got this special session coming up there's going to have to be some additional funding done. I would assume that this is going to stay high in everybody's list in the news here for a while. Yeah and I think another issue that's going to stay on the news at least as it applies to like business clients is we're going to get a tax increase and this is effective from January 1st 2018. Remember the 9, 10 and 11 percent income tax rates we thought we'd got rid of at the end of 2015. Well they're coming back in order to fund and this is very interesting. They have three income tax credits to help the poor that are coming back in. Two of them already exist and the third is basically they're an income tax credit that the feds now have. We're going to be supplementing that with a credit that's 20 percent. A local EIC then. Yeah but only for five years. Okay so the interesting issue is well what happens after five years? Do the tax rates go back to normal? No. Does the reviewed requirements for the for the income tax credit disappear? Yes unless the you know the credit's re-extended. So what I'm hearing then is that they're going to be increasing the rates for the upper earners which is going to generate some additional revenues that's going to fund the earned income credit for the lower earners so income redistribution but only for five years and after five years then they get to keep it. That's right unless of course something else happens. No they might increase rates more. Who knows what's going to happen? Who knows what's going to happen right? Yeah it's always I always find it interesting that we always seem to try and solve our problems by spending more and taxing more you know and rarely do I ever see anybody paying any attention to trying to make things more efficient or more cost effective by reducing costs or increasing efficiencies. It's never the expense side of the equation it's always the revenue side that people are paying attention to. Yeah I think the most recent example of that was the privatization of the Mali hospital system. That happened I guess just finished recently and not without you know lots of resistance and legal. It took several years though to work that out right? Yeah including lots of lawsuits. There was a bill that went through the legislature vetoed by the governor overridden by the legislature to to provide a special benefit to the the retiring workers but then that was found to basically torpedo the tax qualification of the ERS in general. So the courts enjoyed it thank god. Yeah well I don't know if we have time to get into the unfunded liability issues. Well it's just that we just need to know that it's out there yeah it's several billion dollars to tens of billions of dollars and you know it makes the real the real situation like chicken feed. Well and for those that may be listening that don't quite understand what that means I mean the unfunded liabilities are basically the retirement and healthcare costs that are accumulating every year that are due to the retired or to be retired individuals. Yes we promise our state employees that if they are on for x number of years they'll get these benefits and our state constitution protects that and says you promise it to them you can't back down from your promise. And the problem is that this liability continues to grow and get bigger and bigger as people continue to retire and to live longer. And we haven't really made any progress in paying down that liability. It's been growing every year right? We've started paying it down through 2013 law but then you know people are kind of questioning the assumptions about how that unfunded liability never was calculated because you make a you know to get to that number you make an assumption about how much rate of return the assets are going to get. Right. Okay the the you know the current calculations are based on a seven percent rate of return. Wow. Who gets seven percent? I was just going to say where are they getting at because I'd like to get a little bit too. Yeah exactly. And and and if the the assumption that you make about rate of return goes down like if you if you assume it's going to make three percent as opposed to seven percent then the unfunded liability jumps from like 15 billion dollars to 35. 35 billion dollars. Even if we did pay down a little bit of that if the the income that's being projected is at seven percent but that's not real the reality of it is is we're not really making any progress in controlling these costs. Yeah or the or the progress that we're making is way less than than we want. Yeah well thank goodness I'll be retiring soon so I don't have to worry about taking care of that big liability down the road. Leave that for my grandkids I guess. Right. Somebody that's sad but you know but we also have I guess and we touched on this earlier but the special session you said we have some different options that we can look at one is going to be to increase or extend extend is probably the better word that G. E. T. sir tax that we have but the other one was the T. A. T. and then also the property tax now the T. A. T. from what I'm hearing has got some real opposition particularly from the neighboring islands because the the neighbor islands don't want to have an increase in the T. A. T. for their island that would help go pay for the real system. Are you hearing anything similar or different? Yeah and then and then of course the neighbor islands typically get a cut of the T. A. T. as it as it now exists and and they've been fighting for you know a bigger share of of the existing T. A. T. because they say well we need to spend a neighbor island money to take care of these tourists when they're here so we so we ought to get more of the T. A. T. to help us take care of them which is not also has an unsympathetic argument but at some point you know there's there's not enough T. A. T. money to go around so and that's that's what lawmakers are struggling with and then and then I guess we've got the property tax is another option that the city kind of always seems to fall back on and from what I understand uses that is is kind of like the threat that you better work with us otherwise we're going to have to go to property tax you know and I'm not sure how politically acceptable that's going to be. Well the you know the the big issue between the the G. E. T. extension and the property tax is the G. E. T. extension you pay in dribs and drabs right you know every day on every receipt you pay a little bit property tax not so noticeable it kind of adds up right property tax you pay twice a year yeah and and when when the number goes up you notice yeah yeah it's going to be a whole lot more obvious when you see it yeah and then and people notice and then they scream and that's that's kind of the big difference well you know that'll be interesting because I'm hearing an awful lot of screaming already so if that increases the loud the noise is going to be pretty loud you know we've got about a minute left on and then we have to wrap up is there any final words that you'd like to leave with the audience today. Yes please everybody do keep up with you know what's going on in your legislature you have opportunities to go down testify talk with legislators if you if you don't you have to kind of deal with the fallout just like the rest of us do but at least you know if you go down there and and try you can see you tried you know and and making your voice heard is important definitely and I think you know and that's where the support for the tax foundation comes in because you can be a very loud voice and it's always good to have other people with you too but if others can't participate then at least you know supporting the tax foundation supporting your efforts is one way of helping. Yes and we try to be down there and we try to educate lawmakers and others on what exactly it is that they're doing. Very good well thanks again Tom it's always good to have you on the show it's kind of a depressing topic a little bit but an important one because it's something we all are going to be paying for one way or another. Yeah and it's really helpful to understand. It is thank you again this is Reg Baker business in Hawaii. We broadcast live every Thursday from two to two thirty and we focus on success stories or those organizations that support businesses to be successful. Looking forward to seeing you again next week until then aloha.