Audit critical A state audit has found multiple deficiencies in the loan program of the Department of Business, Economic Development and Tourism and said that nearly half of its outstanding loans are more than 90 days past due.
of DBEDT’s
loan program
Nearly half of the loans are
more than 90 days overdue,
the report saysBy Dave Segal
dsegal@starbulletin.comThe report released yesterday by state auditor Marion Higa also criticized the Hawaii Tourism Authority for not adequately managing its contracts.
"There are (DBEDT) deficiencies that need to be corrected," Higa said. "The department is not getting its money back on the loans given out so it's the management of its loans that need improvement."
But Tom Smyth, the administrator for DBEDT's Business Support Division, which includes the loan program, said the financial audit didn't ask the right questions and that roughly half of those loan recipients in arrears are making payments.
The loan portion of the audit, which looked at a five-year period ended June 30, 2002, found that 45 of 94 loans outstanding were at least three months overdue. The total principal balance of the delinquent loans totaled nearly $5.6 million and represented 59 percent of the nearly $9.5 million in outstanding loans.
"The state is of a different mindset than commercial banks," Smyth said. "We're not making loans to generate revenue. We're there to help the businesses and so we're going to be more reluctant to shut a company down because they're unable to pay. It's not in our interest to have workers laid off. We want them to stay in business because they're employing workers and providing goods and services to customers."
The audit also found that 16 loans totaling just more than $2.3 million had been made over the course of those five years.
"(DBEDT) is not circulating the money out for the purposes of what the Legislature made the appropriations," Higa said. "We're looking at a cash balance in those five years of between $6 million and $11 million each year, and $2.4 million will be reverted back to the general fund (in fiscal year 2003) because it's going unused."
Smyth, though, said a slowing economy discouraged business loans. In addition, a lack of state disasters, such as a Hurricane Iniki; and a Cayetano administration policy to make loans only to technology companies, were among some of the reasons why few loans were made. He also said DBEDT's major loan program, the Hawaii Capital Loan Program, was not marketed to the business community because it required that potential borrowers must first be turned down by two commercial banks and then must receive a bank referral. Consequently, Smyth said, DBEDT has returned two-thirds of the appropriated money it's received to the general fund.
"There has not been an infusion from the general fund since 1990," Smyth said. "The (DBEDT) program is self-supporting because it is using the money that is lent and is paid back."
The remainder of the audit, which covered the fiscal year from July 1, 2001, to June 30, 2002, also found that DBEDT's loan files were incomplete, 80 percent of a sample of loan repayment checks were not deposited in a timely manner, unused funds earmarked for contracts or purchase orders were not credited back to accounts, and its administration of petty cash funds needed improvement.
Meanwhile, HTA Executive Director Rex Johnson said the state's marketing agency has been lenient in some contractual aspects because it works with a lot of nonprofits and volunteer groups.
"Rather than being the mean old government, we're trying to help folks along," Johnson said. "And when we do that, some things don't always get done in time. Volunteer organizations and nonprofits sometimes have a tough time getting all the paperwork in on time. But we'll have to be tougher when it comes to compliance."
Among the audit's recommendations was that DBEDT increase participation in its loan programs and implement a formal marketing strategy, revise its procedures for monitoring delinquent accounts, and keep closer tabs on unused funds. The report also recommended that the HTA execute formal contracts before contractors perform services, and that HTA better monitor contracts and payments.
DBEDT Executive Director Ted Liu, who was appointed to his post in January by Gov. Linda Lingle, refused to blame the audit's findings on the previous DBEDT administration.
"I find the findings as contained in this report to be helpful, but for me to make the right judgment, it's not going to be based on a handful of pages in a report," Liu said. "We're going to have to get behind some of these issues and we'll do so with the help of the state auditor's team. We're not putting this on the old administration although that may ultimately be the conclusion we have. I'm looking at how we can upgrade these programs."