On January 29, 1989, the Land Use Commission gave the floor to members of the public wanting to comment on the Hawaiian Riviera Resort petition. Three members of the Hawai`i County Council attested to their hearty support of the development.
Councilman Harry Ruddle told the Commission: “Anywhere we have growth, … county services are going to grow as well as part of the budget. … But yes, I would support the needed county facilities that this project would undoubtedly incur.”
Councilman Takashi Domingo (whose testimony was read by Ruddle): “I wish to convey my personal support for the proposed Hawaiian Riviera Resort. Both the Hawai`i County Planning Commission and County Council unanimously approved this project.”
And Councilman Robert Makuakane: “I have sat down with individuals involved in the project on several occasions and believe that they will do everything necessary to minimize the impact the project may have on existing infrastructure, the community and the environment.”
Each noted that he was testifying as an individual and not in his official capacity. However, their benevolent regard of the project may have had something to do with their efforts to win elective office. As records in the Campaign Spending Commission files show, Palace Development Corporation and Hawai`i Ka`u `Aina, partners in the Riviera project, had contributed heavily to these candidates in the election cycle just ended.
Among corporate contributors to Ruddle, Palace and HKA were the first- and second largest donors, giving $1,250 and $1,200 respectively. Together their contributions amounted to nearly 20 percent of all corporate contributions to Ruddle’s campaign.
Domingo made out even better. Thomas Bodden, one of the officers of Hawai`i Ka`u Aina, and Christine Chidiac, an officer of Palace, each gave $250 to Domingo’s campaign. Belt Collins & Associates, the planning firm for the Hawaiian Riviera Resort, contributed $500. Hawai`i Ka`u `Aina and one of its partners, Hawai`i Ka`u Ranch, each gave $250. Palace gave $1,000. Total donations from parties with a stake in the development amount to $2,500. Total contributions from Palace parties represent about 8 percent of both corporate and individual contributions to Domingo for this election cycle.
Makuakane received $800 from Palace and $1,500 from Patti Cook & Associates, the public relations firm for the Hawaiian Riviera Resort. Altogether, contributions from Palace people represent more than 22 percent of all corporate contributions to his campaign.
The year before, the County Council had approved unanimously the recommendation of the Planning Commission to amend the county General Plan (adopted by ordinance, and amended by ordinance) to provide for development of a resort area in the Kahuku area of the Ka`u District. Both the commission and the council had been lobbied enthusiastically by then-Mayor Dante Carpenter as well as the companies and labor unions involved in the construction business. Carpenter, in turn, had been wooed by not only the developers and several of their agents (whose reported contributions amount to $4,850), but also by the same parties keen to bring further construction to the Big Island. (Carpenter, whose campaign reported receiving $151,195 in corporate donations alone, was defeated by Bernard Akana. Akana’s sole corporate contribution was $300, from Hilo Printers, Ltd.)
Hasty Action
The amendment of the General Plan was virtually required prior to consideration of the reclassification of the proposed Hawaiian Riviera Resort site by the Land Use Commission. The Commission’s rules call for it to consider the “general plan of the county in which the land is located.” Had the County Council not approved the plan amendment, Palace’s petition for land reclassification for its Ka`u property would have been weak, if not moribund.
The plan amendment sailed through, however, with only cursory attention given to such practical matters as the high lava inundation hazard of the area or the future costs to the county of improvements needed to support off-site growth (roads, sewers, water and other services). Included in the ordinance amending the General Plan were vague provisions regarding the development of “a range of residential opportunities” for the resort’s work force and calling for sites to be set aside for public facilities. The developers in addition were told that before rezoning would be approved, they would have to demonstrate their ability to provide all the potable and non-potable water the resort would need, and would be required to disclose “potential volcanic and natural hazards in all sales and investment prospects.” No stipulation was made concerning the developers’ contribution to off-site infrastructural improvements.
Not until the matter came before the Land Use Commission did the county seem to be concerned about its ability to support development in this area with even the limited public services that residents of the Ka`u District have come to expect from the county government. The initial response of the county Planning Department to the Commission’s request for comment on the petition for amendment brought forth, under the new mayoral administration of Bernard Akana, a statement in opposition to the proposed resort. Roughly three months later, however — in April 1989 — the county changed its tune. Representations made to the county by the developers, to the effect that they would give the county sites for police and fire facilities, a “letter of credit” for altogether about $10 million worth of road and public service improvements, and a promise to agree to arbitration in the event the county felt this would not be enough, had evidently allayed the county’s concerns sufficiently to allow the Planning Department to register its official support for the land reclassification.
Carrying Costs
Shortly after the resort developers went before the Land Use Commission, but a full year after the county Planning Commission gave the nod to the General Plan amendment, the county Planning Department finally prepared a report of the fiscal impact that this resort development would have. Other county documents suggest the assumptions in this report might be overly optimistic. Nonetheless, its conclusions are sobering.
The report weighs the estimated costs of providing public services to the South Kona and Ka`u districts against the estimated increases in revenue likely to result from heightened land values in the area. (The additional burden that inflated land values will impose on area residents, who now enjoy some of the least expensive housing in the state, was not considered in the county’s calculation of costs.) The Planning Department’s conclusion, as explained in testimony by deputy Planning Director William Moore on July 27, 1990, was that regardless of whether the developers built the whole Palace-Hawai`i Ka`u `Aina resort or just the Palace portion, “property tax revenues should cover the operating costs, but will not cover or address the capital costs … that would result from this project.”
Richard Eichor, the deputy attorney general representing the Office of State Planning, asked Moore when the county might finally expect to see the increased revenue from property taxes actually pay for the infrastructural costs.
“With respect to operational costs,” Moore answered, “the break-even point will be in four or five years.” But “during the construction period, there is no property tax revenue to the county while there is significant impact. If you include the capital cost, based on our assumptions of the county financing them through bond issues, the project does not provide a positive cash flow until the year 2017.”
Eichor: “And in the interim, when you’re still suffering this negative cash flow, the source is going to be what, increased property taxes?”
Moore: “That’s speculative.”
Eichor: “Somebody is going to have to pay for it.”
Moore: “You pay for things in two way: one through increased taxes or revenues; or through decreased services.”
The scenario of a payback by the year 2017 might itself be illusory. As emerged in questioning of Moore by Winterbottom, the tax revenue schedule was based upon full build-out of both the Palace and the Ka`u `Aina phases of the resort. Moore confirmed that if the full project was not built, governmental costs would not be recovered and the rest of the county would be subsidizing the resort’s development.
Impossible Promises
By the county’s reckoning, the shortfall between costs and revenues amounted to roughly $5 million a year, and even that, Moore noted, did not include the substantial expense of developing and delivering water to the area around the development, whose population will be growing exponentially over the next several years to provide the labor for the resort.
To judge by a report that was being prepared for the county last year, the prospect that the county will be able to pay for any, to say nothing of all, the required infrastructure is far grimmer than Moore indicated. The report, an “Infrastructure Financing Analysis and Plan,” was released in September 1990 and was prepared by Sutro & Co., a San Francisco firm. Occasioning its commission was the county’s need to show the Environmental Protection Agency how it would pay to complete the various sewage treatment projects in Hilo and Kona for which it is receiving substantial federal funds.
Attached to the report is a summary of major capital improvement projects that the county’s Department of Public Works would like to see built in the next six years. There are no frills on the list. If it has been described as a “wish list” (as the Department of Public Works has taken to calling it), that is only because it is unachievable given the county’s financial straits.
Those projects represent existing needs — that is to say, needs as reckoned prior to any intensive development or growth in the area of the Hawaiian Riviera Resort. The total is more than half a billion dollars, with about $134 million of that slated for improvements in the South Kona and Ka`u districts. (The county represented to the Land Use Commission, however, that existing infrastructural needs in this area amounted to just $40 million; total capital improvement expenditures required to accommodate resort-induced growth, the Planning Department told the commission, would be approximately $87 million. Annual operating costs attributable to resort-induced growth were estimated at $4 million for the Palace phase, and $12 million for the full complex.)
Whereas Moore assumed the county would finance the needed improvements through traditional bonding methods (with general obligation bonds being the most widely used approach), the Sutro report suggests this avenue will not be available: “With respect to general obligation bonds, the county is fast approaching its capacity. The Hilo and Kona wastewater projects in particular will serve to exhaust realistic levels of general obligation capacity for several years.”
More generally, the Sutro report noted, “the insufficiency of county resources is readily apparent after attempting to match traditional infrastructure funding sources to the county’s infrastructure needs.”
A ‘Fair Share’?
Throughout the deliberations of the Land Use Commission, the developers and their agents stated on many occasions a willingness to pay their “fair share” of infrastructural requirements, noting pointedly that they were covering all infrastructural costs on the resort site itself.
The particular agreement that seems to have been worked out between the developers and the county calls for the developer to provide letters of credit that the county will be able to draw on as it makes the various capital improvements needed to support the resort and ancillary development.
For the developers, the arrangement has advantages that more traditional (and more secure) fiduciary agreements lack. First, there is no pay-out until the county either is on the verge of incurring an expense, or has actually incurred it. Until that time, the developers enjoy the use of their promised funds.
Second, this is less expensive than a performance bond, which in essence is an insurance policy, with the premium paid by the developers, on the developers’ promise to pay.
For the county, the arrangement has manifest risk. As Gavan Daws and George Cooper point out in Land and Power in Hawai`i (Honolulu, 1985), following the rampant speculation in subdivisions of the 1960s, especially in the Royal Gardens area (where homes now sit under 40 feet of lava), the county’s own Department of Public Works called a halt to the practice of accepting letters of credit in lieu of performance bonds from developers.
“After the experience of the first few years of the boom,” they write, “subdividers were required to post a performance bond on their promise to build site improvements. Usually these improvements were nothing more than roads, and substandard at that. But even so, in the case of Royal Gardens, the county for years was prepared to accept a letter of credit from an affiliate of the subdivider, rather than requiring an actual bond from an unaffiliated company.
“This practice was not halted until 1973, following a memo from the County Department of Public Works: ‘Letters of credit should generally not be accepted in lieu of a performance bond because the future worth of the letter of credit is tied directly to the applicant’s financial stability. In order to avoid such problems, we recommend that performance bonds be insured by a financial institution not connected with the applicant be required.'”
Volume 1, Number 12 June 1991
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