Posted on: Friday, March 14, 2003

EDITORIAL
DFS rent: State must deal with front office

Hawai'i's duty-free operator, DFS, is outraged that the public has been alerted to the fact that, while it hasn't paid a single penny of the $40 million-plus it owes the state in rent because it is "technically ... insolvent," it has managed to make a $100 million payment to its 60 percent owner, LVMH Moet Hennesy Louis Vuitton.

Testifying this week before the House Transportation Committee, Sharon Weiner, group vice president of DFS, says the reason this news should have remained secret is that "in the hands of a competitor, [it] could do our company irreparable harm."

We'd suggest another reason for keeping it quiet relates to what taxpayer outrage might do to the bill now before the Legislature, calling for further breaks on DFS' payment schedule.

Through the long history of DFS arrears in its rent to the state, it has insisted that its earnings must flow unimpeded to its owners, while its obligations end at a bewildering array of corporate firewalls.

Weiner explains that the $100 million payment was "simply partial repayment of a loan" to LVMH, to whom DFS still owes $350 million. Notice that LVMH does not invest money in its subsidiary, DFS, because that would put its money at risk. Instead, it extends loans, the repayment of which appears to take precedence over the payment of its Hawai'i rent.

But wait. "NOT ONE PENNY of Hawai'i Division money has gone to make these partial loan payments," testified Weiner. "That's because Hawai'i Division isn't making any money; in fact, last year the duty-free concession lost $24 million, even with $9 million in relief" granted by the state.

The $100 million payment to LVMH, in other words, came from the profitable parts of DFS. It's a nice piece of work that LVMH enjoys, by which it partakes in the profits of the thriving parts of DFS, but denies any liabilities for the lagging divisions.

It's time for the Lingle administration to sit down with LVMH principals for an intense discussion of the time-honored Republican principle of moral hazard.

To be sure, it makes no sense to "kill the goose" by creating conditions under which DFS can't survive. On the other hand, Hawai'i taxpayers are getting tired of underwriting LVMH's risk.