Cancer Center has $6M nest egg and lawmakers want an accounting

Lawmakers crafting the state budget are questioning why the University of Hawaii hasn’t tapped into more than $6 million sitting in a special fund earmarked for repair and maintenance at the UH Cancer Center, which has been plagued with money troubles.

The scrutiny comes as the university is seeking a recurring $5 million annual appropriation from the Legislature to help sustain operations at the research center, which has seen its main source of income — cigarette tax revenue — significantly decline in recent years. Legislators last year rejected a similar budget request and blasted the university for failing to come up with a sustainable business plan.

The center had been using a faulty business plan that assumed its cigarette tax income would remain constant at $19 million a year. As fewer people smoke, the tax revenue has dropped to $14 million.

During a two-hour budget briefing at the state Capitol on Wednesday, Sen. Jill Tokuda, who chairs the Ways and Means Committee, took UH officials to task for amassing millions of dollars in a special maintenance fund without any public plans to spend it.

“It’s almost like you’ve been holding out on this particular fund,” Tokuda (D-Kailua-Kaneohe) said. “You’re asking — and you have been asking — the Legislature to supplement cigarette tax funds in the amount of $3 million in the past, $5 million this year. And then now you have this other fund as well that is slowly accumulating more and more money.”

Budget reports the university prepared for Wednesday’s legislative briefing show the fund had $6.2 million in it at the start of the fiscal year in July. It’s projected to end the fiscal year with an $8.2 million balance and with a $9.8 million balance the following year.

UH officials explained that a state law requires the university to set up special funds for projects that are financed with university revenue bonds, as the Cancer Center was in 2010. Annual deposits based on a project’s depreciation must be made into the fund, which is intended for future repair and maintenance costs.

Michael Ng, director of the UH system budget office, said the university has several of these funds, which are called revenue-undertaking funds. He said the money isn’t intended for operations.

“My understanding is that they’re there mostly so that when UH does a revenue bond project that there is sufficient funds available for ongoing repair and maintenance,” Ng said. He added that the funds have been mostly untouched because the facility is still new.

Tokuda, who described herself as a big supporter of the center and its mission, said the special maintenance fund has to be a part of the center’s financial plan.

“At the very least, it should be reflected in your Cancer Center financial plan as additional revenue that could be used toward something, because it’s basically just showing income going forward,” Tokuda said.

UH President David Lassner said the university would take a close look at the strings attached to the special maintenance fund. “I think we need to look at the bond issuance and the extent to which we can use this,” Lassner said.

Kalbert Young, UH’s chief financial officer and a former state budget director, contends the special maintenance fund can be used only for capital expenditures.

The law establishing these types of funds, however, appears to grant some flexibility.

The law outlines five ways the money in such funds can be spent, including: “To provide for all costs of construction, operation, repair and maintenance of a university project, university system, network, or any combination thereof, including reserves.”

The statute goes on to say that after “adequate provision is made” to spend the funds in the five areas, “any moneys remaining in the university revenue-undertakings fund at the end of a fiscal year may be expended by the board (of regents) in subsequent years in furtherance of any of the purposes of the university.”

Tokuda said she wants the university to explain how it plans to use the money.

“We know the history of this center has necessitated that every single bucket of resource be looked at. You’re here asking for more money, and continuous money at that,” she said. “This is a fund that has continuous resources building up over time. We need to understand how you’re going to optimize the use of this particular fund. … This is a critical component that’s been missing.”

The center has been drawing down its reserve funds to stay afloat, but that cushion is expected to be depleted by 2020.

One of its biggest expenses is an $8 million annual mortgage payment tied to the revenue bonds used to finance the center’s $130 million Kakaako facility.

The newly hired director for the center, renowned colon cancer expert Dr. Randall Holcombe, told lawmakers that he’s come up with a plan to maximize revenue and reduce expenses at the center. He said the requested $5 million appropriation is critical to that plan.

Holcombe said the center ended last fiscal year with an $8.3 million operating deficit. He expects to narrow that deficit to $7.5 million this year.

“Under my business plan, we will trim an additional $2 million per year off the operating deficit over the next two years,” he said. “So that’s about $3 million that we’re trimming off by increasing some areas of revenue as well as decreasing expenditures by improving efficiencies. That still leaves us with about a $5 million deficit.”

He said the legislative appropriation would help “put us on a long-term, zero-deficit, sustainable path.”