Four years after a 1992 audit of the Department of Land and Natural Resources found fault with the department’s management of state leases, the state auditor has found that nothing has changed.
In summarizing the findings of a follow-up audit conducted earlier this year, Auditor Marion Higa reports, “We found that the same weaknesses in the administration of land leases reported in our 1992 audit continue today. The department continues to lack effective management controls to ensure that the cash performance or surety bonds are released only under proper circumstances.” The DLNR’s Division of Land Management is responsible for managing almost 1,000 land leases, which bring in more than $7.5 million in annual lease rents.
Higa also found that:
Fundamental problems exist in the department’s lease management practices;
Formal policies and procedures to guide lease administration practices are lacking;
Actions by the department and the Board of Land and Natural Resources often contravene effective lease administration; and
Leniency in lease administration is common.
In responding to the audit, BLNR Chairman Mike Wilson attributed many of the failings to a “lack of a commitment to automate/computerize the Division [of Land Management], coupled with the loss of experienced staff through early retirement and the loss of the younger, computer literate staff through the reduction in force (RIF) process. “These, Wilson wrote, “are telling signs of why little, if any, movement has been made to address the deficiencies found in the last audit.”
Wilson also promised to revise the operation manual for the Land Management Division to include “checklists and procedures for release of performance bonds, defaults, and other lease administration issues.” In addition, he wrote, “We will be assigning one person, full-time, to reorganize all the active lease, permit, and document files in Honolulu” into a more orderly system, as recommended by the auditor.
A computer-generated report appended to the auditor’s report illustrates the extent of the problem the department has in collecting its accounts receivables in a timely manner. The report, prepared by the DLNR and attached to Wilson’s reply, is a straightforward tabulation of the total value of accounts receivable due on a monthly basis from October 1995 through August 1996, as well as the value of accounts delinquent more than 60 days. The Hawai`i island office almost always has the highest value of overdue accounts; in November 1995, for example, the value of 60-day delinquent Hawai`i island accounts came to 76 percent of the overall amount owed by lessees and permit holders on that island. At no time in the period reviewed was the value of past-due accounts smaller than 57 percent of the total value of accounts receivable for that island.
(The tabulation in the audit report also provides “adjusted” values for the amounts due and past-due. According to Charlene Unoki of the DLM, the adjusted figures take into account what was owed on leases where board action or legal action prevented the staff from taking the amounts owed off the books through cancellation of the leases. “We believe staff shouldn’t be held responsible for those delinquencies where the staff has done everything possible to resolve them,” Unoki said. As an example of the type of delinquencies that Unoki would remove in adjusting the past-due values, she cited amounts outstanding balances on accounts of tenants of the Kanoelehua industrial lots in Hilo, who are disputing the back rents the state says they owe. Even with the adjustment, Hawai`i island past-due receivables still led the way, with adjusted values of past-due accounts ranging from 23 percent to 68 percent of the overall amount due in any given month. Statewide, delinquent accounts make up anywhere from 16 percent to 47 percent of the total receivables, on an adjusted basis.)
Poor Record Management
One of the findings identified in the 1992 report of the auditor was that notices of default and deadlines for curing defaults mailed out by the department were not handled uniformly. At the time, the department disagreed with the auditor that it should establish formal procedures. Instead, then-BLNR Chairman William Paty responded by saying: “Since written and unwritten policies and procedures are in place, we feel comfortable in addressing many of the findings with an internal memorandum to the appropriate personnel reminding them of their responsibilities… One unwritten policy which we will not change is that of using informal courtesy letters and personal contacts instead of notices of default… Past dealings with and the credibility of the lessee should be considered in deciding the course of action to take. Land agents will be reminded to clearly document that choice if the delinquency is handled other than routinely.”
Several internal memoranda were issued, the auditor found, but the weaknesses identified in 1992 persist. “These weaknesses result from a lack of formal policies and procedures, inadequate internal control practices, and poor records management… These problems overshadow and compound weaknesses identified in our previous audit.” The very organization of lease files was determined to be deficient, lacking in such essentials as summary sheets and so-called “tickler files” that identify important dates in lease management, such as bond and insurance expiration dates and other deadlines related to lease conditions.
The auditor also faulted the department for not segregating important original documents from the working files. Instead, all are lumped together in day-to-day working files. Despite the use of master files, the report noted, “the current status of leases and lessee compliance cannot be determined because the staff is several months behind in filing lease-related documents…. Given this situation, even if formal policies, procedures, and management controls were established, the department could not determine if they were being followed because of the record filing backlog.”
In addition, files are poorly organized. “No attempt is made to segregate or organize materials in a logical manner.”
No Guidance
The auditor criticizes the memoranda issued by the DLNR in response to the 1992 report. “Memorandum/Directive No. 92-1, issued in February 1992, includes a paragraph that simply instructs district land agents not to release time certificates of deposit or other forms of cash performance bonds when a lessee is in default and/or unless the lessee submits an acceptable replacement. The memorandum provides no guidance relative to what reports or records need to be reviewed. It does not require agents to complete a checklist to certify that lease documents have been reviewed.” As a result of poor guidance from department memoranda, the auditor states, “a questionable release of a time certificate of deposit” occurred in 1992.
Beyond the insufficiency of the memoranda instructions, the auditor found instances where the instructions were simply not carried out. Instructions call for issuing demand letters to lessees who are behind in their rent payments from 1 to 30 days. The letters are to inform lessees that they have 15 days to cure the default. On the sixteenth day, if payment is not received, a notice of default is to be mailed.
What the auditor found instead was that instead of mailing the notice of default on the sixteenth day, the O`ahu District Office waits until the DLNR’s Administrative Services Office sends around the late payment report for the following month. The auditor reports that this is done because staff shortages prevent the office from monitoring payments received during the month. This “failure to aggressively pursue delinquent lease rents,” as the auditor describes it, “has several effects: first, it deprives the state of revenue due in a timely manner; second, leniency in enforcing lease provisions can encourage lessees to take more exception to lease provisions, since the lessor appears reluctant to act; and third, if the lessee does default, time delays reduce the likelihood that the state will be able to recover lost revenues. Our review shows that this leniency in lease administration is common within the division.”
In any event, this procedure is at odds with what the law requires. The auditor notes that Section 171-20, Hawai`i Revised Statutes, “specifies procedures that the department is to follow when a lessee breaches or defaults on a lease provision. The law requires that written Notice of Default be sent to delinquent lessees and each holder of a security interest in the lease. The notice must specify the cure period, either as stated in the lease or ‘within less than 60 days’ and what follow-up actions will be initiated if the delinquency is not resolved by the time the cure period expires.”
Ineffective Ticklers
“To address timeliness and compliance issues,” the auditor says, “aging or tickler systems have been implemented at all district offices.” Manual systems are in place at the neighbor island offices, while the O`ahu District Office has a computerized tickler system, installed in January 1995. “However,” the report notes, “the computerized system was not used for several months because no one in the division was qualified to operate the system.”
Regardless of the system, the auditor’s sampling of surety bond correspondence “showed that neither the manual nor the computerized tickler system and follow-up procedures effectively ensured that surety bonds were maintained on a current basis… District offices failed to take appropriate follow-up actions for nine of the 11 leases included in our sample. In addition, the division [of Land Management], which serves as the central administrative office, could not determine the status of the defaults at the district offices.”
Delayed Response
Delinquencies or defaults are not always “aggressively pursued,” the auditor found. “An unreasonable amount of time is spent trying to resolve problems before bringing delinquent or defaulted leases before the Board of Land and Natural Resources. Division staff may be exceeding their authority, since Section 171-20, HRS, reserves the right to grant extensions to the board and not to the division staff.”
But actions of the board itself at times “further contravened effective lease administration.” The auditor provides three examples of board indulgence. Two concern leases to the county of Maui; the third involves a Hilo lease. Total amounts of these three delinquencies were nearly $500,000.
The Division of Land Management has been recently reorganized, with Dean Uchida as its new administrator. According to the audit, Uchida “acknowledged problems… While agreeing that backlogged files prevent an accurate review of lease compliance, he cites the loss of experienced personnel as a major cause of the backlog.”
Uchida, the report continues, has appointed a task force “to develop a comprehensive operations manual… He also plans to reorganize the filing system but is uncertain about whether existing staff will be able to maintain the currency of the files.”
Volume 7, Number 4 October 1996