Court ruling jeopardizes $1.19B in state funds

The ruling could impact more than $1 billion in funds

A state appeals court ruling could invalidate hundreds of state special funds valued at upward of $1.19 billion.

The Hawaii Intermediate Court of Appeals ruled Monday that the fees charged insurance companies by the state Insurance Commission violated the state and federal Constitution and were an "illegal and unconstitutional tax."

The Hawaii Insurers Council protested in 2000 when it was charged $2 million to pay for the state-run Insurance Regulation Fund. The state had transferred the money from the Insurance Division to the state Treasury and the council claimed it amounted to a tax.

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State officials are studying a new state Intermediate Court of Appeals ruling that may change how the state controls more than $1 billion tucked away in special funds.

The court ruled Monday that the state had violated the Hawaii and U.S. constitutions by how it collected money from insurance companies.

The money was to go into the state's compliance resolution fund, within the state Insurance Division, but money was diverted to the state general fund.

"The assessment of a reserve margin, the assessment for multiple departments' overhead, and the transfer of assessments to the general fund or any other fund violated the Hawaii and United States Constitutions as the assessments were illegal and unconstitutional taxes," the court ruling stated.

The Hawaii Insurers Council sued in 2000, the complaint was upheld in state Circuit Court and appealed by the state.

The court said if the assessments had "borne a reasonable relationship to the cost of the services rendered ... there would not have been millions of dollars in excess available for transfer to the general fund."

The court also noted that if the state had refunded the excess it would be "in a better position to argue the assessments were not invalid taxes."

"It appears a substantial amount of the assessments went to creating a reserve margin with the (insurance funds) and to covering the general overhead of not only the Insurance Division, but the Department of Commerce and Consumer Affairs and the Budget and Finance Department," the court noted.

Attorney General Mark Bennett is mulling over an appeal, but is also worried that the ruling could change how the state uses its hundreds of special funds.

Senate President Colleen Hanabusa said if the decision is not appealed it will have a serious impact on all state special funds that collect money from users.

"This decision will have major consequences," Hanabusa (D, Nanakuli-Makua) said. "We are going to have to look at the structure and use of all special funds."

Appeals court Judge Corrine Watanabe said in a concurring opinion that she was troubled by how the insurance commissioner determined assessments "without following the rule making procedures set forth in the Hawaii Administrative Procedures Act."

Watanabe said the court ruling may "impact ... other specially funded programs and the integrity of the state government's fiscal infrastructure."

The state's failure to look at past court cases "may well have dire consequences on the state government's ability to maintain its fiscal infrastructure and funding mechanisms," Watanabe concluded.

Bennett said the decision "will have a significant impact on the way fees can be assessed by government in Hawaii."

J.P. Schmidt, state insurance commissioner, said the decision "clearly was wrongly decided."

For the Insurance Division, which has a budget of $9 million a year, the concern is that it will not have funds to operate next year without the money from the insurance companies.

"If I am not able to assess the insurance companies, the Insurance Division will run out of money in January," Schmidt said.

Rep. Bob Herkes, Consumer Protection Committee chairman, questioned yesterday the division's use of the funds.

"If they are to assess fees, it should be for what it costs to operate the department," Herkes (D, Volcano-Kainaliu) said.

The division is part of the Department of Commerce and Consumer Affairs, which regulates business and is funded with money from the various businesses.