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The Honolulu Advertiser
Posted on: Sunday, December 23, 2007

Hawaii nonprofit grant funding a mystery

 •  Who's getting the money
 •  Feds help Hawaii health clinic, but state turns it down

By Rob Perez
Advertiser Staff Writer

GOOD CAUSES, FLAWED PROCESS

Today: Secretive process run by a few lawmakers determines who gets taxpayer money

Tomorrow: Nonprofits' supporters give a lot to campaign fund of Rep. Magaoay, who helps pick grants

Tuesday: In other states, process is more open and aimed at achieving public goals

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"For a small nonprofit that doesn't have a lot of resources or time to spend with a lot of legislators, it's very difficult to get your foot in the door."

Connie Mitchell | Executive director of the Institute for Human Services

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WHO IS ELIGIBLE?

Any non-government entity can apply for a grant-in-aid.

Here are some requirements:

  • Be licensed or accredited to provide the services for which the grant is sought.

  • Agree not to use state funds for entertainment or lobbying activities.

  • Give the state full access to appropriate records so it can determine whether the grant money is being spent properly and is delivering the desired results.

  • If the entity is a nonprofit, it must be designated so by the Internal Revenue Service.

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    The Legislature has awarded roughly $200 million in grants to Hawai'i nonprofits over the past five years using a loosely structured system in which only a handful of legislators select the charities, and they do so behind closed doors without any formal criteria to guide them.

    Although numerous organizations benefit from the system, it fails to adequately protect taxpayer interests, operates with little independent oversight and is so discretionary that many nonprofit executives have no idea how the decisions are made, an Advertiser investigation has found.

    "To me, it's a mess," said the Rev. Bob Nakata, a former state senator who helps nonprofits navigate the process at the Legislature.

    Lawmakers who make the grant decisions say the system is fair, reflects the legislative priorities of the Democratic majority and provides critical funding to many organizations delivering important services to Hawai'i residents.

    "You have to serve the greater good," said Rep. Michael Magaoay, who manages the grants process in the House.

    While few dispute the merits of the funded projects, the process used for earmarking the grants is plagued with problems, according to the newspaper's investigation, which was based on reviews of government documents and interviews with dozens of people familiar with the system.

    Flaws exist at virtually every step of the process, from how the money is earmarked to how the expenditures are monitored by state agencies.

    Among the shortcomings:

  • While the Legislature usually gets far more requests than it can fund, it has no formal criteria for paring the grant applications and holds no public hearings to give the nonprofit community or the public a sense of how decisions are made to appropriate millions in taxpayer dollars. Even some members of the money committees, which have responsibility for the grants program, are not in the loop.

    "Decisions are made in total darkness," said Rep. Gene Ward, a Republican on the House Finance Committee, echoing the views of several other members. "It's a complete blackout."

  • The system affords so much influence to so few legislators that at least one has been able to leverage his grants position to help raise tens of thousands of dollars in campaign funds from people in the nonprofit community. Magaoay has been the top fundraiser in the House since getting the grants job five years ago, according to an Advertiser computer-assisted analysis of campaign spending reports. The bulk of Magaoay's individual donor support in the past two elections has come from people with ties to the nonprofit sector, the analysis shows.

    Magaoay denies using his grants position to raise money. But his two key fundraising strategists acknowledged that Magaoay's campaign has targeted people in the nonprofit community, hoping to capitalize on his influential role in the grants process. (See Part 2 of this series tomorrow.)

  • The system has become a regular source of funding for some prominent nonprofits, which get money year after year while other charities walk away with nothing. That has raised questions about the fairness of the selection process. The grants program, many legislators and nonprofit executives say, was not intended to fund the same groups again and again.

    Yet 14 organizations, including the Honolulu Symphony, Chamber of Commerce of Hawai'i, Bishop Museum, Hawaii International Film Festival, Waianae Coast Comprehensive Health Center and comedian Frank De Lima's student enrichment charity, got grant approvals in each of the past five sessions. Another 16 got approvals in four of the five years, while nearly 30 finished in the money in three of the five. Roughly 275 organizations, in all, made the grants lists over those five years.

    USE OF FUNDS

    Richard Bettini, chief executive of the Wai'anae health center, which is the major medical provider in one of the state's most poverty-stricken areas, said the grant money helps keep an emergency room operating around the clock. Without a subsidy of roughly $1 million a year, he said, the ER would have to close each night, leaving the Wai'anae Coast with no nearby emergency medical care overnight. The center also has received grants to help pay for renovating and expanding facilities, and that money always is leveraged to attract funds from other sources, such as private foundations, giving the state a good return on its investment, Bettini said.

    "This isn't a blank check," he said. "We still have to convince" legislators of the merits of the projects.

    House Speaker Calvin Say said ongoing programs with broad benefits can be considered priorities.

    Asked about the fairness of some organizations getting money regularly while others get nothing, Say responded, "That's a good point."

    The grants system is structured so that a small group of legislators can make decisions in a short period near the end of the session, as they juggle many other issues. After getting feedback from their colleagues, administration officials, nonprofit supporters and others throughout the session, they craft a grants list behind closed doors as part of the budget negotiations process. Once all the major budget decisions are made, the legislators determine what's left for nonprofits, finalize the grants list and attach it to the budget bill.

    REQUEST FOR AID

    As a growing number of Hawai'i nonprofits scramble for funding from a shrinking number of sources, charities increasingly are turning to the Legislature to seek financing for new programs and facilities or to plug budget shortfalls.

    This year, the Legislature received more than 300 grant-in-aid applications for a record $330 million. Less than half the applications were approved, and most organizations didn't get the amounts they requested. Lawmakers authorized roughly $43 million in grants, bankrolling everything from homeless services to a documentary film on Queen Lili'uokalani's musical legacy. Last year, legislators appropriated more than $70 million in grants.

    Their decisions often mean the difference between a charitable program flourishing or faltering.

    Yet the absence of formal criteria and the closed nature of the process fosters suspicions among many in the nonprofit community that politics play a greater role in the selections than the merits of a project. It's a system, they say, that tends to favor the charities with the means and political connections to lobby effectively for a coveted spot on the grants list.

    "For a small nonprofit that doesn't have a lot of resources or time to spend with a lot of legislators, it's very difficult to get your foot in the door," said Connie Mitchell, executive director of the Institute for Human Services.

    'OPEN-DOOR POLICY'

    But legislators who develop the grants list say the system is open to all nonprofits, is not influenced by campaign contributions and doesn't favor particular organizations.

    The decision-makers, including Magaoay, Say and Finance Chairman Marcus Oshiro in the House and Ways & Means leaders Rosalyn Baker and Shan Tsu-tsui in the Senate, say they attempt to spread the money around, so no one island or district is overrepresented. They also say they use the priorities from the majority legislative packages in each chamber to guide their decisions.

    They say they consider how broadly a project will benefit Hawai'i residents, stressing that not all requests can get funding because of budget constraints. But they insist the selection process is even-handed and unbiased.

    "We don't discriminate against anybody," Magaoay said. "What I have is an open-door policy. It's open to everyone."

    Say added: "I just try to go on merit."

    But without clear guidelines to help them, the charities say all they can do is submit their requests by the end of January, lobby key legislators and hope for the best.

    "When we submit a GIA, we're completely blind," said Sid Rosen, president emeritus for Adult Friends for Youth. "We don't know what the Legislature wants."

    PUZZLING DECISIONS

    The absence of a clear strategy results in a puzzling mix of haves and have-nots.

    Here's a sampling from this year: Lawmakers approved $75,000 for a box-car racing facility on O'ahu, $200,000 for Hawaii Opera Theatre and $50,000 for a film on Queen Lili'uokalani's musical legacy, but gave nothing to purchase equipment for a new medical clinic to serve Chinatown's poor or to expand Mothers Against Drunk Driving programs at a time when alcohol-related fatalities in Hawai'i are on the rise. The groups seeking funding for the latter two projects have never received a grant-in-aid before.

    "It really is a mystery how the decisions are made,"said Debbie Shimizu, executive director of the National Association of Social Workers' Hawai'i chapter.

    In the frenzied final weeks of the session, when other issues tend to dominate the legislative agenda, the rush to decide which nonprofits make the grants list can produce questionable decisions.

    The Legislature, for example, approved a $100,000 grant to the Ethnic Education Foundation of Hawai'i this year, even though the immigrant-assistance group wasn't in good standing with the state. When lawmakers authorized the grant, Ethnic Education had not filed its required annual report, earning a "not in good standing" designation from the Department of Commerce and Consumer Affairs. As of last week, the nonprofit still had that designation on the DCCA Web site, but the agency indicated a report was being processed.

    REPORTS NEEDED

    Although many of the grant-funded programs are creations of the Legislature, they are assigned to state agencies, which usually get no additional funding to provide oversight. As a result, many departments rely on the nonprofits to self-report how the grants are spent and, when dealing with services, what results are achieved. Little independent verification typically is obtained, officials from several departments said.

    The Department of Education, for instance, relies on De Lima's charity to provide an evaluation of the student enrichment program that the comedian conducts at dozens of schools each year. The charity arranges for and pays an outside evaluator to do an assessment, which is provided to the DOE. The most recent report gave the De Lima program an upbeat review.

    Several years ago, DOE did its own evaluation, but the agency didn't have the money to continue that arrangement and turned over responsibility to De Lima's group, according to Russell Yamauchi, a DOE education specialist.

    Because De Lima's nonprofit now pays the tab, the assessment may not seem independent enough, but that arrangement is better than no evaluation at all, Yamauchi said, particularly given the positive impact of the comedian's performances.

    "I believe Frank's program has done a lot of good for the schools," Yamauchi said.

    Ken Yuen, administrative officer for De Lima's nonprofit, said the comedian, wanting to give back to the community, paid for the program for more than 20 years without any state help.

    De Lima brings his brand of humor and a positive, anti-drugs message to more than 150 schools a year, reaching about 120,000 students statewide. Yuen said the students overwhelmingly describe the program as effective.

    'CHECKS AND BALANCES'

    Officials in other state agencies say the self-reporting provides adequate monitoring safeguards, though one administrator noted the oversight is not as stringent as what is required for federal and state contracts that are competitively bid. If red flags arise in the grants programs, those can be further scrutinized, officials said.

    "There are checks and balances built in," Dr. Rosanne Harrigan, a University of Hawai'i administrator, said of the grant program she oversees on alternative treatment for drug addicts.

    Harrigan said the treatment grant to the Natural Healing Research Foundation was inserted into the UH budget by the Legislature, but neither she nor the university president knew about it until the school received the budget documents.

    The basic system the Legislature uses for awarding grants has been in place for more than a decade, and legislators say it has changed little in that period. Nonprofits also can get state funding through purchase-of-service contracts, but unlike the grants system, those are usually competitively bid.

    Legislative approval of a grant doesn't guarantee that a charity will get the appropriated amount. The governor has to release the money, which isn't a sure thing in tight fiscal times. But in the vast majority of cases from the 2002 through 2006 sessions, the full amounts were released, according to state records.

    Gov. Linda Lingle, through a spokesman, would not comment on the grants system used by the Legislature but noted that while she was mayor on Maui, the county's process for approving grants to nonprofits was open and transparent.

    HOW IT WORKS

    To start the grants process at the Legislature, the nonprofits submit formal applications to the Senate Ways & Means and House Finance committees, stating in their requests what the public purposes are for the intended projects to be funded.

    The committees seek feedback from appropriate state agencies, and key legislators are lobbied throughout the session by colleagues, nonprofit executives and their supporters. Some charities use paid lobbyists.

    In the Senate, Baker, who ran Ways & Means for the first time last session, solicited the top three grant priorities from each of her colleagues. House members say a similar solicitation wasn't done by leaders in that chamber.

    Unlike with a regular bill, which must go through a public hearing process, the grants list is drawn up and debated privately. The first inkling that the nonprofits and the public get about who might be on the list is when the Senate attaches its proposed version to the budget bill and sends that bill back to the House several weeks before the end of the session. At that point, the proposed list enters the secretive world of budget negotiations; a final list usually doesn't emerge until near the end of the session.

    Lawmakers don't vote on the list itself, only on the budget legislation, and many members on the House and Senate floors don't see the final list until shortly before the vote, several lawmakers said. By then, the list usually is a done deal.

    MISSING GUIDELINES

    The lack of formal guidelines is considered to be a major flaw of the system.

    Rosen, whose Adult Friends for Youth has received grants in the past, said, "It's irresponsible not to have clearly established criteria and priorities." Without them, he added, the process "becomes a matter of political payoffs."

    Rep. Colleen Meyer, a Republican who has been on the House Finance Committee for seven years, said she has never been briefed about what criteria are used to draft the list. Other members, including some Democrats, said the same thing.

    The decision-makers acknowledged that multiple factors go into compiling the grants list, but they said a project's merit is the key one.

    With so many worthy requests competing for a limited amount of funding, the list-makers added, they have to use their judgment to make difficult calls, just like with other parts of the budget.

    "Somewhere along the line, you have to make these tough choices," said Oshiro, who, like Baker, headed his chamber's money committee for the first time last session.

    Baker said the process always will involve discretion because it's ultimately a political one. "There's probably no way you're going to get this thing to be a clear-cut science."

    Asked why no public hearing is held to at least explain what criteria will be used to make decisions, Magaoay said, "I think that's a very good question."

    Several lawmakers said the process isn't as open as they'd like because of the budget crunch near the end of the session, when decisions must be made quickly.

    Holding public hearings for each request would be impractical, according to Say and others.

    The quick turnaround also can mean some organizations aren't sufficiently vetted, resulting sometimes in red flags such as a group not being in good standing with the state going unchecked, the legislators said. But those oversights can be caught before any money is released by the administration, they added.

    The way the Legislature develops a grants list is similar to its system for deciding which state construction projects will be funded each year, legislators say. Both systems have come under fire for putting too much power and influence in the hands of too few people.

    Baker, Oshiro and other lawmakers acknowledged that the grants process could be improved and intend to explore possible revisions. Baker, for instance, believes the grants shouldn't be awarded to organizations year after year for ongoing programs.

    "Something has to be done to make it a better system," said Sen. Gary Hooser, a Ways & Means member. "What it exactly would be, I don't know."

    Reach Rob Perez at rperez@honoluluadvertiser.com.

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