Legally, the state is obligated to pay OHA 20 percent of the revenue it derives from the use of land once owned by the Hawaiian monarchy.

OHA wants to expand what's covered by the 20 percent rule to get more revenues. But Gov. Ben Cayetano's administration, concerned about the state's budget woes, wants a narrower definition of what's covered.

The changes that the Senate panel approved to a House bill after a 31/2-hour hearing yesterday drew applause from Hawaiian leaders and activists, who had overwhelmingly condemned the House position as abandoning the state's trust obligations to native Hawaiians.

Co-chairwoman Malama Solomon (D, Kohala) said the Senate's proposal "brings dignity and respect" to all sides involved in the volatile issue.

OHA trustee A. "Frenchy" DeSoto added, "I think (the Senate bill) is the first step to a collaborative effort rather than an exorcism."

If a settlement were to involve ceded-land transfers, DeSoto said, she would want OHA to get Sand Island, a desirable tract with its industrial and business activity.

It would be crucial to obtain land with economic potential, she said.

DeSoto said that if the Senate's Hawaiian Affairs panel had advanced the House bill unamended, it would have triggered a lawsuit.

The Senate removed from the House bill a provision that would have nullified last year's decision by then-Circuit Judge Daniel Heely on ceded-land revenue that widened the definition of what was due to OHA.

By including 20 percent of all revenues from community hospitals and public housing on ceded lands and even a 20 percent share of airport duty-free concessions that were off site, Heely misinterpreted legislative intent, according to the House.

That decision could cost the state as much as $1.2 billion, state officials say.

Iwase said the House provision voiding Heely's decision is unfair, premature and unwarranted.