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How to Build a High-End High-Rise

A Step-by-Step Guide

September, 2016

So, you want to build a high rise. Maybe you’ve got a couple hundred million dollars burning a hole in your pocket and an acre or two of vacant land in Kakaako, and you’re wondering: How can I get in on the action? Right now, a half-dozen high rises are going up around town, and another handful getting ready to break ground. So, just in case you were thinking of adding your own giant condominium tower to the Honolulu skyline, we’ve made it easier for you by putting together this step-by-step guide.


The obvious approach would have been to follow the construction of a single high rise from beginning to end. Unfortunately, the typical high rise takes almost three years to build, and that’s not counting the many years it usually takes for permitting or design. But we didn’t want you to have to wait that long.

It turns out that, as part of its Ward Village development, the Howard Hughes Corp. has three high rises going up right now, all within a couple of blocks of one another, and all in different stages of construction.  Waiea is almost complete; Anaha still has about six months to go; and Aeo is just coming out of the ground. That gave us a convenient way to telescope the process of high rise construction, dividing it into three stages. Along the way, we focus on parts of the construction that highlight just how much you’re going to have to depend on distant, often unseen partners to build your high rise.


STEP 1
COMING OUT OF THE GROUND

Before you start to build, you have to prepare the site. If you’re lucky, you start with bare dirt. More likely, you’ve got old structures to demolish, and pavement or old concrete slabs to remove. Even then, you’re probably not done. Much of Kakaako was built on low marshland. Aeo’s property, for example, was only a few feet above the water table. To gain a little elevation, the general contractor, Layton Construction, trucked in thousands of tons of gravel fill, then spent weeks compacting the ground so it would bear the enormous weight of the building. That also makes it possible for the backhoes to trench so you can bring in utilities from the street.

In a sense, though, construction starts with a soil scientist boring test holes in the ground. This is crucial, because your skyscraper is going to perch atop scores of narrow concrete piles that reach as far as 90 feet below the surface. These are augur-cast pi-lings, meaning they’re drilled into the ground with a powerful augur, then, the resulting holes pumped with concrete as the augur is removed. While the concrete is still wet, a cage made of reinforced steel bars – rebar – is lowered into the hole. Once the concrete cures, you’ve got a piling.

It’s the friction of the earth against the rough surface of these pilings that actually holds your skyscraper in place. That’s why you need so many. It’s also why the soil engineer is crucial. By studying the soil beneath the building, she calculates how much friction it will generate. That determines how deep you have to bore the holes for your piles. In some places, it might be 60 feet; in others, nearly 100 feet.

The deeper you have to dig, the more time it takes and the more concrete and steel you have to use. That all costs more money.

Once the pilings are in, they’re tied together by pile caps and grade beams. “Grade beams” is a misnomer, because they eventually lie below grade. Trenches are dug to expose the tops of the pilings, then lined with plywood or steel formwork, and filled with concrete and rebar. When the concrete sets, the formwork is removed and the trenches backfilled with gravel and dirt.

Pile caps are similar, but they tie together pilings that have been clustered to support major load-bearing features, like the elevator shaft or structural columns. Once the grade beams and pile caps are in place, the slab can be poured to tie the whole structure together.

Congratulations, your high rise has come out of the ground.

Left: Much of Kakaako is close to sea level. At high tide, the areas excavated for pile caps and grade beams can fill with salt water. Right, top to bottom: 1. Trenching reveals how much fill is used. 2. Clusters of piles exposed for pile cap. 3. Exposed rebar, ready for the next course of forms and concrete. 4. Building a high rise starts with digging.

Left: Much of Kakaako is close to sea level. At high tide, the areas excavated for pile caps and grade beams can fill with salt water. Right, top to bottom: 1. Trenching reveals how much fill is used. 2. Clusters of piles exposed for pile cap. 3. Exposed rebar, ready for the next course of forms and concrete. 4. Building a high rise starts with digging.

 

STEP 2
GOING UP

The articulating boom that delivers concrete to the top of the building is directed by remote control.

The articulating boom that delivers concrete to the top of the building is directed by remote control.

Congratulations, your high rise has come out of the ground. Thus begins the rhythm of construction. Floor after floor, formwork is built over the stubs of walls and structural columns. Rebar cages are fabricated and lowered into place. Utilities are led through conduits and ductwork. Then comes the slurry of concrete. The floors are poured, and the formwork filled, and the walls gradually rise, always with a toothsome row of rebar jutting out the top, ready to accommodate the next course of formwork and concrete. In fact, this is where it becomes clear that, although your high rise may ultimately look like it’s made of glass and steel, at heart, it’s a colossus of reinforced concrete.

1. Hoppers of extra concrete are hoisted by crane. 2. The concrete pump boom swivels on a tower of its own. 3. Until the new concrete has cured, the floor is supported by a forest of jackstands.

1. Hoppers of extra concrete are hoisted by crane.
2. The concrete pump boom swivels on a tower of its own.
3. Until the new concrete has cured, the floor is supported by a forest of jackstands.

One striking feature  to most modern high rises is the  engineering in the floors. They may look like simple slabs, but technology has evolved to make them thinner so you need less concrete and can have more headroom and more floor space to sell. You’re going to use the same method to strengthen your floors that they do at Anaha: post-tensioning.

Concrete is heavy and, when you pour a big slab, it tends to sag in the middle. This creates tension in the concrete and, while concrete is very good at handling pressure, it doesn’t take tension well. (That’s why concrete is always reinforced with steel.) To correct for sagging, hundreds of powerful cables are run through conduits in the floor and the concrete is poured over them. When the concrete is hard enough, jacks are used to pull the cables tight and the ends are secured to the edges of the floor. The effect is like a trampoline, with the post tensioning putting the concrete into compression instead of tension. In the old days, it used to take 14 days for the concrete to get hard enough. With modern concrete, the floors are ready in two to three days, greatly accelerating construction.

One key feature of high rise construction is the ability to pump concrete to the upper floors. That requires a massive pump and a giant, articulating boom to deliver the concrete to every point on the floor. The pump can stay on the ground, but the boom is attached to the pump by a large- gauge pipe that runs up the inside of what will eventually be the elevator shaft. That’s because the boom has to climb to keep up with construction. To accommodate that upward movement, it’s mounted on top of a self-climbing platform that also fits inside the elevator shaft. It’s a massive machine – 40 feet long, 12 feet wide and three stories tall – that uses hydraulics to hoist itself up tracks that are temporarily bolted to the walls of the elevator shaft. The construction crew often fit out the lower levels of this contraption with a microwave and bathrooms, using it like a temporary lunchroom, says Larry Schrenk, the director of construction in Hawaii for Howard Hughes. “On really big skyscrapers, they actually put in a Subway sandwich shop so the crew never has to come down.”

When the last floor is poured, the platform is disassembled and lowered to the ground by the crane.

STEP 3
FINISHING UP

The roof of Anaha’s garage doubles as the amenities deck and is completely waterproofed. It will eventually house the members’ club house as well as a pool and other waterworks. One end of the pool will be glass and hang out over the property.

The roof of Anaha’s garage doubles as the amenities deck and is completely waterproofed. It will eventually house the members’ club house as well as a pool and other waterworks. One end of the pool will be glass and hang out over the property.

So, your high rise has topped off.

The last floor (which is actually the roof) has been poured. The windows are all in. Now, it’s time to make the space livable. In some ways, this is the part of the process that most resembles the building of single-family homes.

To frame the interior walls, steel studs are bolted to brackets that have been attached to the ceilings and floors. Plumbers and electricians rough in the utilities. Then come the armies of drywall workers. The sheetrock is screwed to the studs. It’s mudded and sanded several times, then primed and painted. The ductwork is connected to the HVAC system. The hardwood floors are installed and the tile-work finished. Carpenters come to hang the cabinets in the kitchen so the appliances can be fitted into place and hooked up. It’s all very familiar to anyone who’s ever watched a house being built.

But there are still differences. For example, some of the penthouses at Waiea have a private swimming pool on the lanai. That calls for pool masons and specialty plumbing. Another example is the floor. Despite intensive efforts by the contractors to get the concrete even when they pour the floors, they’re rarely level. “You can’t imagine how it snowballs if you have a floor that’s even just an inch out of level,” says Howard Hughes’ Larry Schenk. “You’d be able to see that in each room. The lines where the walls or cabinets meet the floors would go up and down.”

Top: Many wires are routed through ducts concreted into the floor. Middle: Additional concrete is frequently needed to level the floors. Bottom: High-end buildings require high-end cabinetry and amenities.

Top: Many wires are routed through ducts concreted into the floor.
Middle: Additional concrete is frequently needed to level the floors. Bottom: High-end buildings require high-end cabinetry and amenities.

That’s not acceptable, particularly if you’re building a high-end condo like Waiea. To remedy this problem, once the walls are in, gangs come through and fill the low spots with an easy flowing layer of mortar. The high spots get chiseled away. This takes place all over the building, because you can’t install the hardwood or the tile until the floors are absolutely level. “We literally spend millions of dollars just getting things back to flat,” Schenk says.

Sometimes there are special considerations. Howard Hughes wants Ward Village to be the largest LEED certified community in the country. That imposes restrictions on the construction process. For instance, the ductwork and blowers for the air-conditioning system are put in fairly early in the finishing process, but they all have to be sealed in plastic. If the ducts and gratings were left exposed, they would likely be filled with dust during the drywall installation. But your AC system will have to be dust-free if you want LEED status. So the plastic can’t come off the ductwork until the construction is almost done.

The buyers of an expensive condominium unit often customize their finishings. Model units give them some design options and show the view.

The buyers of an expensive condominium unit often customize their finishings. Model units give them some design options and show the view.

One other thing: If you’re building a luxury high rise, like Waiea or Anaha, your buyers will often want custom finishes. That means you’ll be working with boutique suppliers and will need a way to track and store the products they send you. In other words, you’re looking at coordinating with more supply chains. And you’ve got to make sure the right products end up in the right units. To ensure that happens, every unit has its own “bible” hanging on the door. This folder can run to several pages and lists specifications for all the finishes in that unit.

HB-09-16-High-Rise_12When you build your own high rise, you also have a “bible,” albeit a figurative one. It contains the building plans and architectural drawings; the spec sheets and supply lists; and the schedules, with their critical path analyses and Gantt charts. Nowadays, all this information is digital, credited in programs like AutoCad or Revit. If you were to print them all up, though, they would come to thousands and thousands of pages. Sadly, there’s no shorter way to explain how to build a high rise. So we’d like to close our little guidebook with an admonition you often see on products: “Some assembly required.”

Please see instructions before you begin.


UNDERSTANDING THE SUPPLY CHAIN

The Concrete World

Your concrete is part of a vast, international industry.

HB-09-16-High-Rise_2By volume, it’s the most traded man-made substance on Earth, yet it has a deceptively simple composition: gravel, sand and cement. The gravel and sand provide the strength; the cement binds them. Cement production involves baking a mixture of crushed limestone and clay at 1450˚C to produce quicklime, which is mixed with a few other ingredients to create a hard substance called clinker. The clinker is then blended with a small amount of gypsum and ground to a find powder: the famous Portland cement.

Although Hawaiian Cement is one of a handful of local companies that mix and sell concrete, it’s the only source of cement in the Islands. All its cement is from Asia Cement. This massive Taiwanese conglomerate delivers as many as 10 shiploads a year to the deep water port at Kalaeloa. Last year, that came to $23 million of cement.

HB-09-16-High-Rise_3Hawaiian Cement has a pretty sophisticated system to handle all that cement. When it’s unloading a bulk carrier, the fine powder is moved pneumatically, sucked like a fluid from the hold of the ship and pumped into a pair of, hemispheric storage tanks that tower over the docks.

From there, a computerized overhead pneumatic system allows the company’s drivers to load the trucks themselves. In boom times, as many as 90 trucks a day pass through the Kalaeloa facility.

Of course, by weight, concrete is mostly aggregate – gravel and sand.

Hawaii, despite its famous beaches, has a shortage of sand. Hawaiian Cement has to import that from British Columbia, where’s it’s quarried from ancient dunes beneath the spruce and fir forests. About three times a year, a bulk carrier brings in about 40,000 metric tons of sand; so much that it takes 50 trucks five days to cart all of it from Kalaeloa to the Halawa facility.

In lesser quantities, Hawaiian Cement imports other ingredients. Certain chemicals can be added to concrete to make it flow better, or cure faster or slower. Some federal contracts require the use of fly ash, a byproduct of burning coal, as a substitute for some of the cement in concrete. All of these products are made elsewhere, adding to the layers of people involved in building your high rise.

The only local ingredient in your concrete will be the gravel. At its Halawa facility, Hawaiian Cement quarries, crushes, and grades millions of tons of gravel a year. Since the aggregate is what gives concrete most of its strength, this local basalt is what ultimately holds your high rise up. And, in an industry that’s famously dirty (worldwide, cement production accounts for 7 percent of human-produced greenhouse gases), Hawaiian Cement runs a surprisingly green operation. Concrete, for example, is water intensive – both for mixing and for dust suppression – but Hawaiian Cement recycles non-potable irrigation water from a nearby farm. They also scrupulously monitor Halawa Stream to make sure runoff from the gravel yard doesn’t alter the pH of the water. They even accept old concrete, crushing it to recycle the aggregate.

Concrete has to be tested. It takes as much as 50,000 cubic yards of concrete to make a high rise. That means mixing thousands of batches of concrete. Because of subtle irregularities in the cement, no two batches are necessarily alike. But your concrete has to meet strict engineering standards. It’s particularly important that the concrete harden quickly to keep construction on schedule.

HB-09-16-High-Rise_4That requires testing, says Gavin Shiraki, sales manager for Hawaiian Cement’s Concrete and Aggregate Division. “The contractor has a third-party lab that checks the concrete on a daily basis,” Shiraki says. Hawaiian Cement conducts similar tests. For every batch of concrete, several samples are taken and formed into four-inch cylinders. Then, at intervals, those cylinders are crushed in a powerful press to measure their strength. Only when the concrete reaches its prescribed hardness can you remove the forms and jack stands and move on to the next floor. Before you complete your high rise, thousands of these little concrete cylinders will be crushed.

 

It Looks Like It’s All Glass

The dominant feature of a high rise is frequently its glass facade.

In fact, with a curtain wall, sometimes that’s all you can see. Not surprisingly, that makes glass one of the project’s larger budget items. “The glass contract for Anaha is about $30 million. That’s over 10 percent of the total cost of construction,” says Larry Schenk.

So, if you want to understand why building a high rise is so expensive and complicated, the glass is a good place to start.

When you build a single-family home, most of the key elements are available at your local hardware store. In fact, the house was probably designed around the specs of standard windows, doors and hardware. That’s not the case when you’re building a high rise. Each high rise is unique and everything is made to fit. Especially the glass. As Schenk points out, “None of the exterior glass of Anaha is off-the-shelf. It’s all custom.”

All that customization means that, to build your high rise, you have to deal with an elaborate, highly specialized supply chain.

First of all, the technical name for modern plate glass or window glass is “float glass.” The term refers to the manufacturing process. For most of the 20th century, plate glass was made by flattening a blob of molten silica sand and a few other ingredients between a pair of steel rollers. This technique was cheap and yielded a relatively smooth surface, but the resulting panes of glass still had to be polished on both sides to be truly transparent. This was time-consuming and expensive. Then, in the late 1950s, an Englishman named Alastair Pilkington devised a quicker, cheaper approach. Instead of using metal rollers, the molten glass was poured evenly onto a bath of molten tin, where, because of the two materials’ difference in density, it floated like oil on water. Because the glass spread evenly over the tin bath, it was perfectly smooth on both sides. The thickness could be controlled by modulating how quickly the molten glass was poured onto the tin, and how long it took to cool.

Acccording to Dennis Jean, the senior project manager for AGA, the glass contractor for Anaha, the float glass for the building is manufactured by a California company called Guardian Glass at its Kingsburg plant. Guardian adds a tinted reflective coating to the raw glass to make it more energy efficient. Sometimes, it also adds spandrels to make it opaque. Then, they ship the glass to the next company in the supply chain: Northwestern Industries in Yuma, Arizona.

At NWI, the glass is cut to size and fabricated into individual window units. Each unit is composed of two panes of quarter-inch glass, with a half inch of space between them, and enclosed around the edges with a polymer seal. Sometimes, argon gas is injected into the space for additional insulation. These finished units are then trucked to AGA’s plant in Livermore, California, where they’re fitted into custom-made aluminum frames, packed into custom crates called “bunks,” and shipped in containers to Hawaii.

That’s the easy part.

A key design feature of Anaha is the curved glass at all four corners of each floor. If your skyscraper is going to use curved glass, that adds another step to the supply chain. Instead of Yuma, the raw glass is shipped from the Guardian factory to Standard Bent Glass, a specialty glass fabricator in Pittsburgh. There, each pane is heated until it’s plastic enough to bend over special forms. Only after the glass conforms to the proper radius can they fabricate the individual, double-paned units. Those are then installed in their custom aluminum frames, crated and shipped to Honolulu.

Getting the glass here is only half the job. It still has to be installed. On site, AGA’s local glaziers are responsible for the custom-made mounting brackets and molding that hold the windows in place. They also install each window. For curtain walls – the kind where the entire surface of the building is glass – they bolt the windows to aluminum brackets that were embedded in the edge of each floor when the concrete was poured. In this system, the weight of the glass is carried entirely by the brackets. For “window glass,” the weight of the glass rests on top of the floor or a wall; the brackets merely hold it in place.

The whole contraption is fabulously complex. “For Anaha,” Jean says, “each glass panel has 147 different parts: brackets, bolts, screws, glass, etc.” Maybe more to the point, almost every one of those 5,000-plus panels is unique.

Onyx Has Its Own Specialists

If you want to build a high-end skyscraper, you  have to include high-end finishes.

HB-09-16-High-Rise_14Each of those has its own supply chain, often with tentacles that reach around the globe. For example, the designers at Waiea wanted to use book-matched slabs of pink onyx to line the walls of the showers in several penthouse units. It turns out, though, there aren’t many sources for pink onyx. The giant slabs in Waiea came from an old, family-run quarry in Iran. But the trip from the mountains of Persia to Kakaako is circuitous. Bruce Kumove, whose company, BMK Construction, is responsible for the onyx, walks us through the process.

It starts with a man named Raoul Luciano, a Swiss stone expert who acts as a sort of third-party inspector and quality-control consultant. “This guy is the best,” Kumove says. “He did the stone at the new World Trade Center in New York and the stone for the Getty Museum. He’s been in the business for 35 years and has offices in London, New York, Los Angeles and Houston. This is all he does.”

Luciano’s main job was to make sure Waiea got onyx that would work for book-matching. That means taking a thick slab and slicing it into two thinner slabs, then opening them, like a book, so that the vein patterns in the onyx radiate symmetrically from the centerline. Onyx is quarried in giant blocks – in this case, with nine-foot faces – so it’s hard to assess the color on the inside. “Luciano hand-picked which blocks to use so they would mirror properly,” Kumove says.

Although the Iranian quarry had the best pink onyx, it wasn’t able to finish the stone to the standards Waiea required. “Once Luciano selected the blocks,” Kumove says, “they were put on 40-foot semi-trailers. They were so large that, if you were lucky, you could get three blocks to a trailer.” Then, the blocks were trucked through Turkey and Eastern Europe to Italy. It took six months to get the stone from the quarry in Iran to Italy.

Processing the marble took another eight months. The big blocks were cut into slabs using a gang-saw. This is a gigantic industrial device with a rack of evenly spaced saw blades at the top and a hydraulic lift at the bottom. It works by setting the onyx on the lift and hoisting it inexorably through the scything rack of saw blades, cutting the stone as clean as sliced bread. Then the slabs are carefully numbered so that adjacent slabs can be used for book-matching.

Cutting onyx is slow, but it’s not the only time-consuming process, Kumove says. “Onyx is a very unstable and brittle material. It cracks very easily because it’s full of cavities. So, once they cut the book-matched slabs, they have to fill the cavities with epoxy and polish it. They also apply a layer of epoxy and mesh to the backs of the slabs. That’s why onyx is such an expensive stone: it’s so difficult to work with. There’s also a lot of wastage. You might get 20 slabs out of a block, but 50 percent might be waste. And it takes a lot of time for all this to happen.”

Even after the onyx is crated and shipped, the international nature of the stone industry doesn’t end. “There aren’t a lot of people that understand how to deal with book-matched onyx,” Kumove says. “It takes experienced marble masons. To make sure the job is done right, we have a special crew that we built especially to handle these slabs. Most of them are Ukrainian.”


CHOREOGRAPHING THE WORKERS

Building a high rise calls for a lot of coordination between workers. Clockwise from top: 1. Concrete worker signals the boom operator. 2.The temporary elevator requires an operator. 3. Boom operator supervises concrete pour. 4. Metal formwork gives the concrete its final shape.

Building a high rise calls for a lot of coordination between workers. Clockwise from top: 1. Concrete worker signals the boom operator. 2.The temporary elevator requires an operator. 3. Boom operator supervises concrete pour. 4. Metal formwork gives the concrete its final shape.

The job of your general contractor is to organize all the different construction activities. Every subcontractor needs space and time for staging and loading. They need to be able to work without interference from other subcontractors. They have to be able to get supplies when and where they need them, so they need some of that scarce crane time.

And it’s not just the subs that need coordinating. As the contractor, you’ve got to deal with moving utilities, traffic stoppages and temporary structures to protect pedestrians. You’ve also got to respect the needs of your neighbors, some of whom may also be tenants.

For example, to make sure Pier 1’s and Nordstrom Rack’s stores would still be able to access their loading dock, Howard Hughes designed Anaha so the bottom level had enough vertical clearance for a semi-trailer to pull in under the building and do a three-point turn.

As each newly poured floor cures, work surges forward on the floors below. Each floor is divided into distinct areas, and crews rotate through them to do their work in the proper order. A gang comes through to mark the profiles of the non-load-bearing walls and permanent furnishings on the floors. Other gangs rough in the plumbing and electric. Still another gang comes through to install the windows. And all of this work reaches a crescendo after the glass goes in. Once the floor is weather proof, the finishing can begin.

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Trump’s Effect on Hawaii

The state’s congressional delegation lays out five risks, two opportunities and five strategies for Hawaii in the Trump era.

April, 2017

Interviewed for this story are the four members of Hawaii’s congressional delegation, all Democrats:

Sen. Mazie Hirono
Sen. Brian Schatz
Rep. Colleen Hanabusa
Rep. Tulsi Gabbard


FIVE RISKS

1 OBAMACARE

(The repeal of Obamacare would) have an impact on everybody on Medicare in Hawaii," says Sen. Mazie Hirono.

(The repeal of Obamacare would) have an impact on everybody on Medicare in Hawaii,” says Sen. Mazie Hirono.

One of the biggest changes proposed by President Trump is a repeal of the Affordable Care Act, with no specific replacement yet agreed upon. An estimated 20 million people nationwide receive health insurance through the ACA. In Hawaii, the potential loss of the ACA is mitigated by the state’s long-existing Prepaid Health Care Act, which had already provided health insurance to many of the categories of people covered by Obamacare elsewhere in the nation.

“In general, Hawaii and Massachusetts have been the two states that had the most difficulty complying with the exchange requirements of the ACA,” Hanabusa says. “That’s because we already had what I consider to be the best health care systems in the country.”

Those systems will largely remain in place if Obamacare is repealed, but many of those who keep their overall coverage will still lose some benefits. “It’s going to have a huge impact on everybody on Medicare in Hawaii,” Hirono says. “They will end up paying more for prescription drugs, for example. And they won’t get the kind of preventive care they get under ACA, even though a lot of them don’t realize that yet.”

Similarly, people who are self-employed or between jobs will either lose their coverage, or at least the subsidies that make their coverage affordable. Obamacare requires health insurance companies to cover people with existing medical conditions; many Republicans say they will continue that provision, but no longer require people to have health insurance coverage or pay a penalty. That requirement helped subsidize the premiums of less healthy people; without those subsidies, it’s likely that health insurance premiums will skyrocket.

2 IMMIGRATION

Hirono notes that Trump’s anti-immigration policies will be another risk for Hawaii, especially given his choice of Jeff Sessions as attorney general.

“Sen. Session’s position on immigration is very clear,” she says. “When I first got elected to the Senate, Democrats were in the majority. Since the majority members preside, I took many turns presiding over the Senate. Sen. Sessions would come down to the floor of the Senate on a regular basis to express his opposition to any kind of comprehensive immigration reform.”

That opposition was in the context of one senator among a hundred. As attorney general, Hirono says, Sessions will wield wide prosecutorial discretion. For instance, he could help decide what happens to the young people in the Obama administration’s Deferred Action for Childhood Arrivals program. That program allows some undocumented immigrants who entered the United States as minors to receive a renewable two-year period of protection from deportation and eligibility for a work permit.

“At his confirmation hearings, when he was asked if he would start deporting the DACA people, he wouldn’t say he wouldn’t,” Hirono says. “We have about 300 DACA people in Hawaii. And there are many more undocumented aliens not in DACA; they won’t come out of the shadows for fear of providing information that could be used against them in some way.”

Hirono is relatively confident that people who enrolled in DACA are safe for now. “I think there would be such a hue and cry if the DACA participants were targeted for deportation, because part of what they were told was that their information would not be used for those purposes – although there was always a caveat that could change.”
Noting she’s an immigrant herself – the only immigrant in the Senate – Hirono says, “I will do everything I can to make sure they’re not among those who are deported, just because they participated in DACA. Remember, DACA allows these young people to go to school, join the military, participate in the life of our communities in a way that brings them out of the shadows.”

3 ENVIRONMENT

Hanabusa, who sits on the Natural Resources Committee in the House, says one of the most important issues for Hawaii is how Trump and the Republican-controlled Congress approach key environmental issues, such as the Endangered Species Act. “For example,” she says, “there have long been attempts by the Republicans to, in effect, limit the number of endangered species, not allowing new species to be added to the list.”

Hawaii is the extinction capital of the world, and the Endangered Species Act has been a key tool in protecting some of the state’s most fragile habitats. Diluting the ESA, or limiting enforcement of its provisions, could affect everything from military training protocols to land-use practices in the state.

There’s also climate change. As a tropical island chain, Hawaii is especially vulnerable to the effects of climate change: rising sea level; the loss of coral reefs due to ocean acidification and warming sea surface temperatures; the increasing frequency and intensity of major storms; and the gradual loss of unique ecosystems. But Trump and many in the Republican majority are climate-change skeptics and support domestic oil extraction, fracking and the resuscitation of coal mining. All of these accelerate climate change. That’s why Trump’s nomination and the confirmation of Scott Pruitt – a climate-change denier and advocate of the oil, gas and coal industries – to head the Environmental Protection Agency is likely to have the most effect on Hawaii.

4 RUSSIA

All these issues – Obamacare, immigration and environmental policy – have long been part of the basic divide between Republicans and Democrats. But Hanabusa says the Trump victory has introduced new risks, though their specific impact on Hawaii may be more attenuated.

“One area that I feel will be a problem,” she says, “is the whole issue of the security briefings that we’ve received about the role of Russia in our election. It has nothing to do, necessarily, with this particular administration’s beliefs about Russia; it has to do with finding out exactly what happened. To have the three major intelligence agencies agreeing (that the Russians interfered in the election) I think is a major statement. So, I see lines drawn on this specific issue, but I don’t necessarily see it as Democrat versus Republican, because you hear Republicans, like John McCain, who feel there really needs to be an investigation of the actions taken by the Russians.”

Hanabusa, like all members of the House, has seen the classified version of the report on Russian meddling in the election. She say’s she’s confident in the conclusions drawn by the intelligence agencies.

“I think they were very careful, perhaps even too conservative in their conclusions. Maybe that’s a better way of putting it. I think that they could probably have gotten further than they did. But, that notwithstanding, there’s still the fact that they’re not finished with their investigation.”

5 UNKNOWNS

"We remain well situated to attract further Department of Defense investment." -Sen. Brian Shatz

“We remain well situated to attract further Department of Defense investment.” -Sen. Brian Shatz

Russia is a known risk, Hanabusa says, but it’s the unknown risks that are more worrying.

“I think the real issue for Hawaii is that we don’t know what a Trump administration is going to look like,” she says. “The concern I have is the fact that Trump got elected in such an unconventional manner. He wasn’t elected by the party; he’s an outsider. You don’t even know whether or not he’s interested in re-election. And it’s the desire for re-election that tempers what his next step will be.”

Trump isn’t the only source of worry, Hanabusa says. She points out that Republicans in Congress have also introduced some new and novel risks, though their exact impact isn’t clear yet. She gives the example of the Holman Rule, a procedure that allows any member of Congress to use the budget process to reach down to any individual in the federal government and cut their salaries. First enacted in 1876, before the advent of merit-based employment in the federal government, the Holman Rule was rescinded by Democrats in 1982. This year, though, reviving the rule was one of the first affirmative acts of the Republican-controlled House.

To federal employees, the return of the Holman Rule looks like a scary attempt to undermine the independence of the civil service – especially combined with early moves by the Trump administration to identify federal employees who disagree with administration policies. In a heavily Democratic state, like Hawaii, there are undoubtedly a lot of federal employees who would fit that category.

“People may not take the rules of the House seriously,” Hanabusa says, “but they have major implications. The Holman Rule is one component of that. There are also components regarding subpoenas. All this gives you an idea where they’re headed. But, when they implemented the Holman Rule, you have to wonder, How do they want to use this? What do they think they can do with it?”

TWO OPPORTUNITIES

1 MILITARY SPENDING

Increased military spending in Hawaii largely depends on whether the new administration sustains Obama’s “pivot” to the Asia-Pacific region. This plan reflects the growing importance of the region and shifts military resources so that, for example, 60 percent of the country’s naval fleet would be based in the Pacific. After all, the Pacific Command, based at Oahu’s Camp Smith, is responsible for 55 percent of the Earth and includes the world’s three largest economies: the U.S., China and Japan. Trump hasn’t said much specifically about the pivot – either on the campaign trail or as president – but he has advocated for a major increase in military spending. That bodes well for Hawaii, which depends heavily on military spending to balance the ups and downs of the tourism industry.
In some ways, the Asia-Pacific pivot and the potential increase in military spending in Hawaii predates and is independent of the Trump presidency, according to Schatz.

“There are some specific opportunities for Hawaii over the next four years that exist regardless of who’s the president,” Schatz says. “And we remain well situated to attract further Department of Defense investment.”
He points out that retired Marine Corps Gen. James Mattis and Rex Tillerson, the new secretaries of defense and state, both support the pivot, as do key members of Congress.

“My judgment is that Trump hasn’t thought very deeply about it, but that he will defer to his secretaries on this. And, at the legislative level, we now have a bipartisan consensus around Hawaii’s critical role. So, when it comes to the shipyard at Pearl Harbor, the Pacific Missile Range Facility on Kauai, the Pohakuloa Training Facility on the Big Island, the Jungle Operations Training Center at Schofield, all of the service branches are full speed ahead when it comes to defense investment.”

Gabbard, a member of the House Armed Services Committee, as is Hanabusa, notes there’s a similar consensus in the House. “I also see an interest and growing commitment in Congress to pass not only an authorization bill, but an appropriation bill in a timely fashion. One of the challenges for the private sector, as well as the military, is that when you have temporary continuing resolutions and temporary funding bills that only last for a month, or three months, or six months, that lack of certainty is quite harmful to our military capabilities. You can’t plan training activities, and it ultimately costs more in the long run. So, passing a funding bill where you know how much you have to spend for the year has been the No. 1 request from our military leaders in Hawaii.”

Although Trump hasn’t spoken much specifically about the pivot, he has said he wants to build more ships. That could bode well for Pearl Harbor, according to Hirono.

“ ‘Ships’ means ‘Navy’,” she says. “And the Navy’s presence in the Asia-Pacific is very much here in Hawaii.”
But Hirono expresses caution amid all the noise about increased military spending.

“There’s an issue as to how we’re going to pay for the over $350 billion increase in military spending over the next four years,” she says. “I certainly wouldn’t want to sacrifice the domestic programs that are so important. Not to mention that national security isn’t only dependent on what we do with the military; it’s also the appropriations and money that we give to the State Department, the FBI and Homeland Security. Those are all nonmilitary areas that are just as important for our national security. Then, there’s the state of our economy. If our economy is not flourishing, of course, that also affects our national security and our ability to do things for our country and our people. It’s all tied together.”

All the same, military spending looks like one area where Trump will prove to be an asset for Hawaii.

“Everybody knows I’m not a Donald Trump fan,” Schatz says, “but one thing I’ll say for him: He’s not a small-government guy. So, from the standpoint of being worried about a massive reduction in federal funding, that’s a little lower on the list than other risks, like geopolitical instability and unlawfulness.”

2 INFRASTRUCTURE

"The Armed Services Committee is the most partisan in the House." -Rep. Colleen Hanabusa

“The Armed Services Committee is the most partisan in the House.” -Rep. Colleen Hanabusa

Trump’s willingness to spend also bodes well for infrastructure investment in the state.

“Hawaii is not different from most other places,” Gabbard says. “The infrastructure needs we have across the state, in each of our counties, is great. This is the same challenge in many states in this country, and it’s an area where both Democrats and Republicans and this administration, I think, have an opportunity to work together and actually get an infrastructure bill passed. This would be good for Hawaii and for communities across the country.”

The question, of course, is: Why would the Republicans in Congress pass an infrastructure bill now when they steadfastly refused to increase infrastructure spending during the Obama administration? Maybe it’s because now Republicans are working with other Republicans, rather than across the aisle. Whatever the reason, Trump has created momentum in Congress to do something about infrastructure, Gabbard says.

“Republicans are talking about the need to pass an infrastructure bill, and the president has already begun to meet with different building-trade unions, as well as with Democrats and other Republicans to begin forming an idea of what an infrastructure bill would look like. Democrats in the Senate are putting forward their own ideas. So, on both sides, there’s interest and an appetite for working together and passing this legislation.”

It’s easy to overstate this consensus, though. Democrats, still stinging from the Republicans’ treatment of Obama, remain skeptical. Also, the two parties have widely divergent philosophies about how to pay for any infrastructure bill. Trump’s “plan,” for example, is largely funded through an 82 percent tax credit for private investment. In other words, investors would build roads, schools, airports and bridges largely on the taxpayers’ dime, and then own them and collect the tolls or rents. To Democrats, that looks like a government handout to wealthy investors. Democrats, on the other hand, want to pay for infrastructure through taxes, ideally on the rich; but the tightfisted Republicans in Congress have long balked at new taxes of any kind.

So, while everyone seems to want an infrastructure bill, it’s not clear there’s a plan they can all agree on. Gabbard remains optimistic.

“I think it’s premature to say there’s any one, specific plan that’s been put forward. There have been a lot of different ideas, and I think some have potential and others don’t. The point is that the conversation is happening, and that’s what’s necessary in order to end up with a final product. Hopefully, that will be able to pass Congress with bipartisan support.”

FIVE STRATEGIES

1 COMMITTEES

Broadly speaking, Hawaii’s congressional delegation agrees on the big issues in the Trump era. The real question is: How should they address those issues?

One thing working for them is that all four Hawaii members of Congress serve on committees that are strategically important for the state. In the House, both Gabbard and Hanabusa are on the Armed Services Committee. Hanabusa also serves on the Natural Resources Committee, and Gabbard is on the Committee on Foreign Affairs. Between them, the two congresswomen are well situated to participate in the debates that most affect Hawaii. The problem is that the House of Representatives is a purely majority-rule body. That means Democrats in the House have almost no power. To get anything done, they have to work with Republican allies. That’s easier on some committees than others. Given Hawaii’s reliance on military spending, it’s fortunate that Armed Forces is one of the easiest committees on which Democrats can find Republican allies.

“The Armed Services Committee is the most bipartisan in the House,” Hanabusa says. “So, if we’re able to share our concerns about how we address the Asia-Pacific, in terms of China and North Korea and those issues, if you can find a partner on the other side of the aisle who shares similar concerns, we can get a lot of things done.”

She points to her work on the National Defense Authorization Act with Randy Forbes, the former Republican congressman from Virginia. The NDAA, which funds the military, is the one piece of legislation that always passes the House in a bipartisan manner, she notes.

“When I was in Congress before, Randy Forbes and I had a series of meetings about, ‘What does the pivot to the Asia-Pacific mean?’ Working together on that issue, we were able to put what I consider to be necessary pieces of legislation in place through the NDAA, and we were able to address a lot of the Asia-Pacific questions. That was only because Congressman Forbes and I shared the same interests and concerns.”

Gabbard offers similar examples of partnering with Republicans on issues important to Hawaii.

“One is the Native Hawaiian Education Act,” she says. “This was a piece of legislation that Sen. Inouye and Sen. Akaka had championed when they were in the Senate. It required reauthorization, but it faced opposition from some Republicans and even potentially some Democrats. I was able to work in a bipartisan way with both Republicans and Democrats to be able to get this legislation included in a larger education bill that passed the House of Representatives. This wasn’t something that was necessarily easy to do, but by having a working relationship with my colleagues on both sides, treating them with respect and Aloha, this kind of collaboration resulting in passing legislation is possible.”

2 RULES

Collaboration isn’t the norm in the House. That’s because the Republican majority of 237 to 193 (with five vacancies) is large enough that the votes of Democrats, like Gabbard and Hanabusa, typically carry no practical weight. It’s also why House Democrats are sometimes forced to resort to political stunts, like their sit-in on the floor of the House over gun control last June.

Even in the Senate, where you need 60 votes to get some things done, Democrats are sometimes obliged to resort to symbolism – for example, boycotting confirmation hearings, even though Republicans would simply change the quorum rules and vote with no Democrats present. These tactics may not affect legislation, but they have meaning, according to Hirono.

“Majority rule is a lot more challenging,” she says. “So, in a place like the House, the voice of the loyal opposition becomes ever more important. That’s why, when they held the sit-in, it was an important symbolic action. And symbolism can go a long way. Look at the Women’s March, for example. You can call that symbolism if you want, but I think that, to the extent that all these millions of people marched all over the world, and that they continue their engagement, that will make all the difference.”

Senate rules make that chamber of Congress much more bipartisan than the House. Consequently, Hawaii’s senators are better positioned to block some of Trump’s proposals. Hirono serves on five committees, including the Armed Services Committee, where, as the ranking member on the Subcommittee on Seapower, she can be an important voice for Pearl Harbor and the shipyard. But it’s Schatz who’s probably best positioned to resist some of the more controversial proposals of the Trump administration and the Republican majority. As a member of the powerful Appropriations Committee, and the ranking member of the Subcommittee on Military Construction, Veterans Affairs and Related Agencies, Schatz has real say on how Congress actually spends our tax dollars.

But, regardless of their committee seats, the members of Hawaii’s congressional delegation still have to make strategic decisions about how to deal with Trump and the Republican majority. This is a dilemma faced by every Democrat in Congress. Some believe Democrats should pick their battles and cooperate when Trump proposes things like increased infrastructure spending, or paid family leave – policies that have long been planks in the Democratic platform.

Others advocate full resistance. They say the party should do what the Republicans did to Obama: Oppose everything the Republicans and the Trump administration propose. Hawaii’s Congressional delegation isn’t that revolutionary and they look for opportunities to work with Republicans. According to Hanabusa, Russia is one area where Democrats can find enough Republicans who share their concerns about Trump.

“I think you’ll find Congress will come together on that,” she says. “It’s not just a matter of whether (Russian intervention) affected the victory of Donald Trump or the loss of Hillary Clinton; it transcends that. It’s about the integrity of our system and whether we’re going to allow a foreign power, or the leader of that country, to interfere with something as sacred to the people as our electoral system. I think that’s going to be a major surprise. I don’t thing they will stick to the party line. I think you’ll find both sides agree on that. I think you’ll also find the House Oversight Investigation Committee will hold meetings on that.”

3 SENATE

Any hopes for resistance to the Trump agenda likely rests in the Senate. Not long ago, that opposition would have centered around the confirmation hearings for Trump’s cabinet nominees. Hirono and Schatz voted against most of Trump Cabinet nominees, but all those who didn’t withdraw were confirmed despite Democratic opposition.

This highlights how the Senate’s vaunted 60-vote rule has diminished since the Democrats, under then-Majority Leader Harry Reid, changed the rule that required 60 votes to confirm presidential nominees. Now, except for Supreme Court nominees, approval only takes a simple majority. That’s what every Trump Cabinet nominee got, though Betty Devos needed a tie-breaking vote from Vice President Mike Pence. This raises questions about how Hawaii’s two senators will approach Trump’s nomination of Neil Gorsuch to the Supreme Court.

“I will be spending a lot of time going forward on the Supreme Court nominee,” says Hirono, who sits on the Judiciary Committee. “That person could have a very pivotal impact on individual rights. For example, this court has, I think, tipped the scales in favor of corporations against individuals. I can cite a number of cases that exemplify this: Lilly Leadbetter, Hobby Lobby, Citizens United. Many of these were five-to-four decisions, so the next person on the Supreme Court could make the difference.”

At press time, a Supreme Court nominee still needs a super-majority of 60 votes to avoid a filibuster in the Senate. The question is whether the Democrats will be willing to use a filibuster to try to block Gorsuch (or any Trump nominee) from taking the bench. If they do, they risk Republicans invoking the so-called “nuclear option,” using the same procedure as Harry Reid to get rid of the filibuster for all executive nominations. Even given that risk, Hirono is unequivocal about her willingness to use the filibuster to protect issues important to her.

“If the nominee is someone that raises concerns regarding fairness, access of individuals to the courts, and things like that, I would do everything I could to raise those concerns. I really care about the potential of overturning Roe v. Wade.”

4 APPROPRIATIONS

"On both sides, there's interest and an appetite for working together on infrastructure." -Rep. Tulsi Gabbard

“On both sides, there’s interest and an appetite for working together on infrastructure.” -Rep. Tulsi Gabbard

Regardless of what happens with the Gorsuch nomination, the Senate’s 60-vote rule still applies to legislation. That’s part of what makes Schatz’s role as a member of the Appropriations Committee so important. The House of Representatives may pass a budget on a simple majority vote, but Appropriations has to pass a bill that actually authorizes how that money is spent. Ending debate and bringing that bill to a vote will still require 60 votes.
Perhaps more important, Schatz says, the Appropriations Committee is one of the last bastions of bipartisanship in Congress.

“It takes a certain kind of senator to even want to be on that committee anymore, because there’s not a lot of fighting. There’s negotiating, but we try to hold each other and our priorities harmless from whatever battles are happening on the Senate floor or in the country. So, although I’m never overconfident, I’m reasonably certain that, when it comes to people like Thad Cochran and Pat Leahy, when it come to myself, as the top Democrat on the Military Construction and Veterans Affairs, and Related Agencies Subcommittee, this is about what’s in the country’s best interests and what’s in our own states’ best interests. It’s especially true that my being the ranking member on the Military Construction Subcommittee puts us in a better position to make sure that resources continue to flow into Hawaii. There’s never zero risk and, with Donald Trump as president, there are tremendous challenges ahead. But, when it comes to making sure that federal investment continues to come to Hawaii, the Appropriations Committee is where the rubber hits the road.”

Schatz’s optimism about the Appropriations Committee extends to its role in limiting Republican plans to gut Obamacare. The House can act alone to cut the program’s funding, using a procedure called reconciliation. But they can’t pass a new law without going through the Senate. “So, they can only ruin the current law,” Schatz says. “They can’t do any fixing without 60 votes, and without the participation of multiple committees: the Health, Education, Labor and Pensions Committee; the Finance Committee; and the Appropriations Committee. My judgment is that it is now more likely than not that the Republicans will either leave the Affordable Care Act alone, or make minor tweaks and call it something else.”

Schatz also thinks the political and economic realities of gutting Obamacare are causing many in the Republican majority to lose their nerve.

“I’ve learned, since 2016, that I’m not very good at predicting,” he says, “but I think it’s fair to say that they’re realizing the promises they’ve made on the Affordable Care Act just don’t add up in terms of the math. Just to take one part of this: They promised to provide coverage to people with pre-existing conditions; they want to extend coverage to young people until they’re 26; and yet they want to eliminate the individual mandate. That will not work. We need a risk pool to be able to subsidize people who may require more expensive care.

“The Republicans didn’t have to worry about any of that as long as Barack Obama was president; they could pass all these irresponsible bills (confident he would veto them), But now it’s, ‘You break it, you bought it.’ They don’t have President Obama as a foil anymore, so if they muck with the health-care system and make it worse – and they’re certainly going to make it worse – they’re going to own that. They’re terrified of that prospect.”

5 ENVIRONMENTAL RISKS

Even on the environmental side, where Trump and the Republican majority are probably most at odds with the Democrats, Schatz is curiously optimistic. Although he and Hirono were both among the most ardent critics of Scott Pruitt, Trump’s controversial choice to head the Environmental Protection Agency, Schatz doesn’t believe the survival of the nation’s major environmental laws is at stake. More to the point, he’s confident the election of Trump doesn’t spell disaster for Hawaii’s delicate environment.

“On the Appropriations side,” he says, “we think that we have a pathway for dollars to continue to flow to Hawaii for environmental priorities. Of course, on the policy side, it’s fair to say we’re not hopeful about making progress on any new laws. But the Endangered Species Act, the Clean Water Act, the Clean Air Act – those all remain federal law. So, regardless of the pronouncements of the new administration, they are duty-bound to obey the law.”

Schatz’s argument can be extended to address how Democrats should deal with Trump’s propensity to ignore the truth: It’s OK to search for common ground with Republicans, but you have to stake out principles that are non-negotiable.

“There’s a tendency in this administration for the president to declare things to be true that he wishes to be true, and to try to short circuit the arduous process of making or changing public policy. While I understand we’re not going to make a ton of environmental progress under Trump, there’s no reason to accept that we’re going to backslide on the bedrock of environmental law in this country. That includes clean air, clean water and endangered species protection.”

Schatz pauses a moment for emphasis before adding, “That’s an area where I’m perfectly willing to engage and fight.”

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Toxic Waste in Paradise

     Photo: iStock

Thirty years after it shut down, the old Gasco site in Iwilei is still a vacant lot. For generations, it converted heavy petroleum into synthetic gas and light oils. Now, its storage tanks, thermal cracker unit and pipelines are long gone and, in their place, is a field of gravel and weeds.

All that remains of the old gasworks is its contamination – a vast underground reservoir of viscous tar and toxic aromatics, like benzene, toluene and ethylbenzene. Indeed, the Gasco site is one of the most contaminated sites in the state, and the technical and legal consequences of that contamination are why the land sat vacant for more than three decades. Even so, three years ago, Weston Solutions, an international environmental engineering company, bought the property – and all the liability that goes with it.

That’s because the four-acre site is prime real estate. It’s near downtown, the harbor, airport, highways and the planned rail line. Weston plans to clean it and redevelop it, but three years after buying the land, Weston’s project still faces technical glitches and regulatory hurdles, and has become a symbol of Hawaii’s contaminated lands problem.

     Operations manager Dave Griffin, left, and Mark Ambler are 
     confident that Weston Solutions’ chemical oxidation process 
     can clean up the old GasCo site in Iwilei. The contaminated 
     property is immediately makai of the Home Depot store.
     Photo: David Croxford

Distribution of toxic sites

Here’s the good news: Hawaii is much less affected by contaminated sites than most Mainland states, according to Fenix Grange, manager of Site Discovery, Assessment and Remediation for the state Department of Health. That’s largely because we haven’t had as many heavy industries as in the Rust Belt or the petrochemical regions of the Gulf Coast. Also, according to Grange, it’s rare for contaminated properties here to sit idle.

“In Hawaii, because land is so valuable, most large, urban properties that have contamination on them get developed anyway,” she says. “People just make the cleanup and control costs part of their redevelopment plans,” Grange says.

Nevertheless, industrial areas like Iwilei, Campbell Industrial Park, Mapunapuna and Kakaako are heavily contaminated, which complicates land sales and development. The main issue, of course, is liability for the required cleanup, which can mean millions of dollars in uncertain expenses.

Beyond these large, well-known industrial sites, there are hundreds of anonymous, smaller sites: dumps, auto-repair shops and old underground tanks at gas stations. Former sugar and pineapple plantations have dozens of contaminated sites that were once used for fertilizer storage or pesticide mixing.

The state Department of Health has investigated more than 1,700 sites of potential contamination, nearly half of which merited further action. “We have about 800 sites in our database that have current or historic contamination that are either still dirty, or were dirty and have been cleaned up,” Grange says.

Joint and several liability

Hawaii’s rules on toxic sites are mostly derived from the U.S. Environmental Protection Agency’s regulations. “In federal law,” Grange says, “liability is ‘joint and several,’ which means anybody associated with the contamination is in the chain of responsibility. The regulators look first to the party that actually caused the contamination. Then they look to the current property owner. But anyone associated with the contamination is in the chain of responsibility.” That means, the current property owner is on the hook, but so is the previous owner.

An excellent example is Weston’s other Oahu project, the old Chem-Wood facility in Campbell Industrial Park. From 1973 to 1988, Chem-Wood, a Campbell Estate tenant, used copper chromate arsenic to pressure-treat lumber there. Campbell sold the property to Chem-Wood in 1989, but, under duress from the EPA to clean up the site, Chem-Wood went bankrupt in 1997, leaving behind tanks of the toxic chemical. In 2008, vandals broke in, spilling 300 pounds of the copper chromate arsenic. Arsenic levels in the soil are now some of the highest in the state.

In the intervening years, other responsible parties have disappeared. The most recent owner, a Japanese businessman who also faced pressure to clean up, walked away from the property, taking haven from the EPA in Japan. His predecessors went bankrupt. But bankruptcy is not an option for the Campbell Estate; its pockets are too deep. Until it sold the site to Weston Solutions, it was stuck with all the liability for the cleanup, even though it hadn’t been the owner of the property for more than 20 years. That’s the principle of “joint and several.”

The uncertainty and risk created by joint and several liability has made it difficult to redevelop parcels that are contaminated – or are even suspected of contamination. As a result, the EPA and state regulators have devised programs intended to ease liability for buyers that want to redevelop a contaminated property. The state’s Voluntary Response Program, for example, provides owners and purchasers with technical assistance, quicker oversight and some relief from future liability.

“With the VRP,” Grange says, “a developer comes in, agrees to characterize a site and take responsibility for the contamination up to a level suitable for their proposed use, and then they’re free from additional liability.” She adds that the liability for the remaining contamination doesn’t simply go away. “That liability stays with whoever caused the contamination in the first place.”

She gives an example from Iwilei: “The site of the Lowe’s store has a bunch of petroleum-contaminated soil from the old ConocoPhillips tank farm. Lowe’s wanted to build its store there, but it didn’t want to assume all of ConocoPhillips’ responsibility. So it entered our VRP and agreed to remediate within the property boundaries to a level that was safe and appropriate to build a commercial store. The VRP leaves the remaining environmental responsibility with ConocoPhillips.”

Probably the most important program for encouraging the redevelopment of contaminated lands has been the federal Brownfields Program. This law, which was mirrored at the state level in 2009, provides many of the same protections as the VRP. “We have about 20 VRP sites in the state,” Grange says. “But with the new Brownfield purchaser law, I think there will be less need for those in the future, because they can get those protections automatically now.”

One of the big differences with the Brownfield Program is its funding options. “Right now, we have what’s being presented as the poster child for Brownfield,” says Mike Yee, one of the principals at the local consulting firm EnviroServices and Training Center. “That’s our East Kapolei site, the pesticide-mixing site and surrounding area in Ewa that the Department of Hawaiian Homelands wants to put homes on.” Through the Brownfield Program, DHHL is funding some of its environmental assessment costs with a $200,000 EPA grant. DHHL is also the first entity to use a $1 million EPA revolving fund administered by the state Department of Business, Economic Development and Tourism. This money can be used for the actual cleanup and paid back after the property has been redeveloped.

“Wow,” says Yee. “What a wonderful way to use federal money: to bring that money into our state to investigate and clean up contaminated sites. It’s good for the developer, good for the state and, ultimately, good for the community – not to mention the environment.”

Weston has created an interesting business model for its Gasco and Chem-Wood projects. Typically, environmental firms are simply consultants or subcontractors; the developer remains liable for the contamination. But Weston bought these properties outright. In effect, Weston has gambled on its expertise in environmental engineering, believing it can purchase properties at a discount, clean them and sell them at a premium. In the interim, though, Weston is the responsible party as far as DOH is concerned. In the lingo of environmental engineers, Weston has bought the liability.

“I’d like to tell you that we’re really smart at this,” says Dave Griffin, Hawaii Operations Manager, “but we have a card up our sleeve: We buy an insurance policy. We engage insurance to underwrite this risk for us, so if we encounter 50 drums of methyl-ethyl that nobody knew about, we can recover some of our expenditures.”

While being the property owner is much riskier, Griffin points out some advantages. To begin with, any upside on the development end of the deal belongs to Weston. And since the company’s cleanup agreement with DOH is based upon the end use for the property, Weston can tailor its cleanup process to a specific function, potentially saving money.

There’s also the method of payment. Although Weston technically “bought” the property from BHP, the details of the contract are more complicated: The seller pays most of the downstream costs. “Instead of billing for hours,” Griffin says, “we get paid up front. So now we’re sitting on that money, drawing interest. Financially, that makes a lot of sense.”

Rick Smith elaborates: “You get paid for everything up front,” he says. “So they (property sellers) pay for the insurance. We don’t pay for that. … The cost of the cleanup, what we actually do in the field, all that’s paid up front. All that’s part of the calculation.” But he notes there’s a lot of prelude before the symphony of cash. “That reward, that big lump of money, doesn’t just stroll in the front door. There’s a lot of work that goes into putting one of these deals together.” In this case, the deal took 18 months to arrange.

“It’s not for the faint of heart,” says Griffin. “The truth is, we’re trying to do the right thing here. By redeveloping this property, we get jobs, we get tax base and we get a more vibrant community out of the deal. That’s our kind of model. Would we like to make some money at the end of the deal? Absolutely. We found a piece of property that’s been sitting vacant for 30 years (the old Gasco site), and it’s right next to the highest-selling Costco in the country. We think we’ve found a little gem here. But, in the end, it’s Weston’s contamination now.”

 

Bankers and Consultants

Although a large, international company like Weston Solutions can afford to self-finance its projects, most local companies interested in redeveloping contaminated property will need a lender. And that’s just the beginning, says Scott Rodie, environmental risk manager at Bank of Hawaii.

“Banks don’t like uncertainty,” says Rodie. “What we try to do, cooperatively with the client, is help them avail themselves of the experts that are out there.”

That means making sure their clients have qualified environmental consultants and appropriate insurance, and that, overall, they know what they’re getting into.

One problem is figuring out if your advisors are knowledgable. “It’s unregulated and unlicensed,” Rodie says. “Under federal law and Hawaii Revised Statutes, there are requirements that you have an ‘environmental professional,’ as defined by the rule, perform a Phase-1 (site investigation). But, again, it’s unlicensed. You have nearly nothing to go after” if they get it wrong.

“So it’s buyer beware,” Rodie says. Or, better yet, listen to your banker.

 

 How Toxic Land is Cleaned

Environmental engineering companies have several ways of cleaning contaminated land, from the most basic method to high-tech solutions.

First, figuring out if there is anything toxic in the ground, what it is and where, can be complicated. Mike Yee, of EnviroServices, elaborates: “How far down does the contamination go? How wide has it spread? What are the actual contaminants and what is the level of the contamination? Then we look at remediation alternatives – what’s the best way to treat it? Normally, there’s not just one way to clean up a site, and there are a lot of factors that go into determining which one you select.”

One option is very basic: dig up the contaminated soil and remove it. Damon Hamura, project manager for EnviroServices, calls it “Bag it and tag it.” With this method, you’re not actually getting rid of the contaminant; you’re just moving it – often to a landfill.

That’s sometimes the only solution, particularly with metals contamination, but it presents its own problems, including moving truckloads of contaminated soil through the neighborhood.

“Sometimes,” Hamura says, “they just put it back on the same site – a kind of reinterment. They dig a pit, put all the contaminated soil in there, then cover it with concrete or asphalt. That’s called ‘encapsulation.’ ”

This is the strategy being used at the Chem-Wood site in Campbell Industrial Park.

When it comes to cleanup options, Hamura says, “Removal is a pretty short list, but when you get to remedial action, it’s a relatively long list. And it’s getting longer as technology grows.” This is particularly true for petroleum-based contaminants, the prevalent form of soil and groundwater pollution in Hawaii. For example, you have various kinds of bioremediation – basically using petroleum-eating microbes, either natural or introduced – to remove the contaminant. This is often combined with sparging, essentially bubbling oxygen through the groundwater to improve the effectiveness of the bacteria.

A more radical approach is thermal desorption. “Basically,” Hamura says, “you’re heating up the soil, trying to burn off the contaminants. But you also need to capture the vapor that’s produced. Usually, you use this method for organic contaminants. If you have a metals issue, that’s not going to do much for you.”

Often, remediation is an ongoing responsibility. Many properties, especially those that have passed through the VRP or Brownfield Program, require “administrative controls.” These controls might forbid digging or strictly limit the use of the property.

The remediation can also be engineered into the new development. In areas with petroleum contamination, like the Lowe’s and Costco sites in Iwilei, this probably involves the installation of a vapor barrier and a vapor extraction system.

Weston plans a more aggressive approach with the tar and benzene at the Gasco site. “We’re proposing to use in situ chemical oxidation,” says David Griffin, Weston’s operations manager in Hawaii. “That’s pumping 40,000 gallons of diluted industrial-grade hydrogen peroxide into the ground. That treats the contamination. (The byproducts are carbon dioxide and water.) Plus, it destroys the contaminants in place, so we’re not bringing them to the surface, putting them in trucks and hauling them through the local neighborhoods.” This drives the benzene out of the groundwater to a ventilation system on the surface, where it’s burned off. “Then, we do a monitoring program to make sure we’re meeting the levels we signed up for,” Griffin says.

This system is not without risks. Last September, the flame arrester failed on the thermal oxidizer – basically a big furnace – and the resulting backflash caused an explosion in the PVC ventilation system, which ignited a small fire in a benzene vent. No one was hurt, but the fire department arrived in HazMat gear and took two hours and 200,000 gallons of water to put out the tiny fire. Nevertheless, Weston is confident in its system – early tests suggest it’s already lowered the benzene level 60 percent – and only awaits Department of Health approval to expand from the current test grid to the whole site.

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Hawaii Timeshare Controversy

BY DENNIS HOLLIER

     Photo: Courtesy of the Grand Waikikian at Hilton Hawaiian Village

It seems like a contradiction: The traditional hotel business in Hawaii is shrinking even while the hospitality industry recovers from the recession, more visitors arrive and they pay more per room than last year.

The relative decline of stand-alone hotels is a trend that has persisted for years and will stretch into the future. Over the past decade, hotel rooms have fallen from 70 percent of the state’s lodging inventory to less than 57 percent, according to a report from the state Department of Business, Economic Development and Tourism. Even as Hawaii tourism enjoyed boom times during most of the past 10 years, the overall hotel inventory actually declined by 7,599 rooms.

No stand-alone hotels are being built today while almost every other form of visitor accommodation has grown, including condominium hotels, hostels, vacation rentals and, most importantly, timeshares. As the number of hotel rooms fell over the past decade, timeshare’s share of the overall hospitality inventory doubled.

Hawaii now has 87 timeshare resorts and that number keeps growing in a time when no one is building stand-alone hotels. Almost every major hospitality company in Hawaii is developing new timeshare properties, converting existing hotels into timeshare, or rehabilitating the timeshare they have.

Timeshare also has its detractors. Many owners complain about high maintenance fees, or that the flexibility that seemed so straightforward during the sales pitch doesn’t always work out in reality. Even industry executives acknowledge timeshare’s shady past, when the industry was dominated by high-pressure sales and dubious claims about investment potential, but they say much of that bluster is gone and the industry has grown more sophisticated. This change is partly due to the introduction of more consumer protections and better self-policing, but mainly because the industry today is dominated by big corporations like Hilton, Disney, Hyatt, Starwood, Marriott and Wyndham. These are some of the best-known brands in hospitality and they’ve helped bring timeshare into the mainstream in Hawaii.

Prices in Paradise

Timeshares aren’t cheap, especially in Hawaii. A typical two-bedroom unit in Waikiki can sell for upwards of $80,000 for a prime week (though the same unit might sell for half that in the resale market). This suggests that a well-appointed, two-bedroom apartment in Waikiki is worth about $4 million, clearly an inflated price. And the cost doesn’t end with the purchase price. Timeshare owners must pay maintenance fees, which cover everything from property and excise taxes to routine maintenance and the condominium’s reserve fund.

The maintenance fee for that two-bedroom timeshare in Waikiki will likely set you back upwards of $1,000 annually for each week of ownership. Not surprisingly, these maintenance fees are one of the main objections of potential buyers. Imagine paying condo fees of $52,000 a year.

     Joe Toy, president of the consulting firm Hospitality Advisors, says 
     timeshares represent 13 percent of Hawaii’s total lodging inventory.
     Photo: Rae Huo

Nevertheless, the role of timeshare within the hospitality sector is growing. Joe Toy, president of the consulting firm Hospitality Advisors, reports that there are nearly 10,000 timeshare units in Hawaii, or 13 percent of the total lodging inventory. The allure of timeshare is such that nearly 6,000 Hawaii residents own timeshares in Hawaii.

Timeshare’s influence is even more obvious when you start to look at occupancy rates. “In Hawaii, timeshare properties average about 90 percent occupancy,” Toy says. “And that’s down from prior years.” To put that in perspective, Hawaii hotel occupancy in the bitter year of 2009 was about 66 percent. The reason for the difference, of course, is that timeshare owners have prepaid for their lodging and they want to use it. That means their vacation plans are less likely to be thwarted by economic or political upheavals.

“Even after 9/11,” Toy says, “timeshare occupancy was in the 70 percent range, when the rest of the state was around 30 percent.”

This is one reason so many hotel companies have added timeshare to their quiver: When your hotel guests stop coming, you can still count on the timeshare crowd to help fill your restaurants and shop in your stores.

Other numbers reinforce this picture. Toy’s report shows that the average stay for timeshare visitors is nearly a week. They typically travel in larger groups, and they tend to spend more money in the community, nearly $1,600 per party. In other words, these are some of Hawaii’s most reliable and free-spending visitors. They’re also locked in; the state doesn’t have to spend its marketing dollars to find and persuade them to come.

There are other benefits to the overall state economy from timeshare. One is a marketing strategy that liberally uses incentives and gifts to attract people to timeshare sales presentations. “That’s sort of a fundamental part of our marketing,” says Bryan Klum, executive VP of Hilton Grand Vacations. “In exchange for the customer giving up some of their valuable vacation time, we usually provide some sort of gift.” These gifts might be discounts on accommodations, or credits that can be spent at the resort’s restaurants and shops. More frequently, though, the gifts are virtually cash. “We often just give customers Ala Moana gift cards,” Klum says.

     King’s Land by Hilton
     Photo: Courtesy of King’s Land by Hilton

Hilton is far from unique. “As an incentive, we offer $125 dining coupons that can be used at several different restaurants in Lahaina,” says Robert Welch, general manager of Marriott’s Maui Ocean Club. “It’s a huge part of our marketing.” All these marketing dollars ultimately end up in the pockets of local vendors rather than in those of out-of-state media and advertising outlets. Large properties in Waikiki, which may give sales presentations to 10,000 to 20,000 customers a year, each contribute millions of dollars annually to the incomes of the shops, restaurants and activities in their neighborhoods.

Then, of course, there are jobs. “There’s a lot of economic benefit from our industry,” says Hilton’s Klum. “There’s the tax revenue that’s raised; there’s the passed-along spending of our customers; there’s the marketing money that we spend, both in state and out of state. But where the rubber really meets the road is the number of people we’re able to employ directly.” Hilton alone, he says, employs more than 700 people in its timeshare operations.

Disney estimates the construction of its Aulani project on Oahu created 1,200 new construction and permanent jobs. According to Hospitality Advisors, the timeshare industry directly contributes more than 4,400 jobs to the Hawaii economy, with a total payroll exceeding $226 million a year. It’s worth noting: That’s an average annual income of nearly $51,000.

Developers’ Incentive

The timeshare industry has been one of the few private sources of economic growth in the state over the past two years. For example, Disney’s Aulani project was built in the teeth of Hawaii’s most severe economic turndown in a generation. When you add in other developments, timeshare generated more than $200 million in capital expenditures in the state during 2009 and 2010, according to the Hospitality Advisors report. This year, Toy says, the industry projects an additional $80 million, which means there are currently more than 3,000 new timeshare units in the pipeline. Hotels are another matter entirely.

“Looking back over the last few years,” says Marriott’s Welch, “the only lodging construction in the state has been timeshare. And over the next 10 years, we have a plan to spend about $1 billion on more timeshare development.” That plan includes projects that are currently partially built, like Koolina and Kauai Lagoons, as well as others on the drawing board. Similarly, Hilton is in the entitlement process on two new towers at Hilton Hawaiian Village, and is selling units at the Grand Waikikian.

Dan Dinell, vice president at Hilton Grand Vacations and chair of the Hawaii chapter of ARDA, the industry trade association, puts that in perspective. “I know of no pure hotel project planned anywhere in the state,” he says, “but there are several timeshare projects planned.” He emphasizes that by adding: “There’s nobody who would develop a stand-alone hotel now in Hawaii; it just doesn’t pencil out.” In other words, the future of Hawaii’s hospitality industry is timeshare and mixed-use.

That’s because timeshare is simply a better capital machine, says Mitchell Imanaka, principal of Imanaka Kudo & Fujimoto, and the former chair of the Hawaii chapter of ARDA, the trade association for the timeshare industry. “The business model,” he says, “has to be contrasted with the hotel model, where someone comes in and builds a project, and hopes that by branding it, they’ll have a certain level of revenue and visitors.” In other words, the developer’s capital is buried in the project, and it may take years of uncertain profits to extract it again. “But the timeshare model permits a developer to go to market, sell his interest, and generate capital to either replenish his coffers, or to make a profit on the sale.” No less important, the ability to extract capital early helps mitigate the risk in the project. “It’s a very compelling model,” Imanaka says. “Because the return is likely to be higher for the developer.”

Timeshare Taxes

Despite timeshare’s growing importance in Hawaii’s hospitality industry, it’s still misunderstood. In January, Gov. Neil Abercrombie proposed legislation that would have more than tripled the transient accommodation tax paid by timeshare owners. According to the governor, this was an attempt to bring timeshare’s TAT in line with that paid by hotel guests. “The objective,” he said, “is to have equitable tax treatment to ensure that the people of Hawaii have adequate funds to support the impacts of visitors to the Islands.” In this sense, he believes the timeshare visitor and the hotel guest should be treated the same.

But industry advocates point out that timeshare owners are already treated differently. Toy says timeshare units already pay more taxes than comparable hotel rooms. For example, as a fee simple owner of real property, a timeshare owner pays property tax. When a timeshare unit is rented out as a hotel room, GET is charged. These visitors are also charged exactly the same TAT as hotel guests. Moreover, timeshare owners do pay a transient accommodations tax, albeit somewhat lower, when they use their own units.

It’s this last tax that industry insiders find most galling. To the governor, it’s simply a matter of equity. “In terms of sharing roads, public parks and hiking trails with our own residents,” Abercrombie says, “it doesn’t matter whether a visitor is staying in a timeshare or a hotel room – the impacts on our Islands are the same.” But the industry turns the equity question on its head. Marriott’s Welch puts it this way: “I believe Hawaii is the only state where a TAT is applied to people sleeping in their own beds,” he says.

Timeshare advocate Imanaka says another problem is what an increased TAT would say to outside developers. “The increase itself would have sent a very negative message to the timeshare industry, to the timeshare owners who visit Hawaii, and to the investment community who invests capital here,” he says. “We’re a capital-poor state, meaning we need to import money in order to keep things running here. The last thing we want to do is send a negative message to the investment community saying, ‘Your dollars aren’t welcome here.’ And that’s my fear: that this will have a chilling effect on investment here in Hawaii.”

Instead of hiking taxes on timeshares, Imanaka says, the state should be nurturing the industry. “If we did, we would not have budget shortfalls as dramatic as we’re experiencing today. We would not have Furlough Fridays; we would not have to look at closing social services, having to tax retirees’ pension benefits, having to tax away Medicaid reimbursements, and the list goes on. Timeshare is the answer; it’s certainly not the problem. And what we have to do is embrace it, make sure the industry continues to thrive. Because we all benefit from that.” 

 

 

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Companies Love to Hate the PUC

BY DENNIS HOLLIER

The mood was tense in the packed Senate hearing room in December, as angry Neighbor Island businessmen, farmers and representatives from community organizations testified before the Committee on Commerce and Consumer Protection against the Public Utilities Commission. The immediate cause for the rancor was an interim decision by the PUC in September that allowed Pasha Hawaii Transport Lines to begin limited interisland cargo shipping between Honolulu and Kahului and Hilo.

Before this ruling, interisland cargo service was provided exclusively by Young Brothers – a monopoly contingent on the barge company serving not only the state’s large, profitable ports, but also the smaller, unprofitable ones, such as those on Lanai and Molokai. But the interim order imposed no such obligations on Pasha.

That’s what caused the stir. In the wake of all the discontent, Sen. Rosalyn Baker, chair of the committee, spoke testily of the need to reform the PUC, a process that this blowup may have both hastened and complicated.

     Outgoing Chair Carlito Caliboso Photo: Rae Huo

The intent of the Pasha decision, according to the previous commission chair Carlito Caliboso, was simply to find out if more competition among water carriers would help improve service and lower costs for consumers. Young Brothers, and many of its Neighbor Island customers, had a different take. They viewed the PUC’s ruling as fundamentally unfair to the highly regulated interisland barge company, and potentially lethal to the businesses that depend on its service, particularly those on Molokai and Lanai.

Even worse, they viewed the process the PUC used to reach its decision as opaque and capricious. As Baker points out, the commission held no public hearings, let alone Neighbor Island public hearings, before making its ruling. Then, one day before the Senate hearing, the commission denied a Young Brothers’ request to reconsider its decision. “I thought the commission behaved most arrogantly to the folks that came in from the Neighbor Islands to be heard,” Baker said later.

But assigning blame for the commission’s failings is more complicated than it seems.

Quasi-Judicial Agency

The PUC is a small state agency with astonishingly broad regulatory powers. According to its 2010 annual report, it is responsible for regulating electric utilities, telecommunication companies, water and sewer companies, and bus and trucking companies. In other words, a huge part of the state economy falls under its jurisdiction; yet, early last year, the agency had a staff of fewer than 40 people. For most purposes, the three PUC commissioners operate like a quasi-judicial body, with the chair presiding over lawyers, engineers, analysts and accountants who conduct research and provide technical assistance. This small cadre of professionals has to provide the expertise to regulate the diverse industries under their jurisdiction.

The Division of Consumer Advocacy is in even worse straits. In 2010, this agency, which is supposed to represent the public’s interest before the PUC (and is funded out of the PUC’s special fund), had only 11 staff positions filled. Yet, the division is responsible for much the same analytical and policy footwork as the PUC. In fact, PUC actions often can’t proceed because of delays caused by the division’s understaffing. For a while, the division simply stopped processing certification applications from telecommunications providers, according to a legislative report. Consumer Advocacy officials didn’t respond to repeated requests to comment for this story.

     Sen. Rosalyn Baker, head of the Senate’s Commerce Committee, 
     has had some run-ins with the PUC.  
     Photo: Courtesy of Senator Roselyn Baker

It’s not surprising that the most common complaint about the PUC is that it’s slow and inefficient. However, that fact has to be viewed in the context of how the agency works. Regulated companies typically bring cases, called dockets, before the commission for consideration. Dockets range from something as simple as an application to operate a motor carrier, to a petition for rate relief from a water carrier, to something as complicated as decoupling, a new policy that fundamentally changes the business model for the electric company. A docket isn’t that different than a court proceeding: There are motions, opportunities for interveners to join the docket, and periods for discovery and rebuttal. All of which take time.

And there are a lot of dockets. In 2010, 330 new dockets were filed before the PUC. In addition, there were still 271 dockets pending from 2009. Altogether, the commission completed 448 dockets over the course of the fiscal year, and left 153 pending. All those figures are improvements.

Diverse Complaints

Even though few individuals are willing to go on the record – their companies are still regulated by the commission, after all – criticism of the PUC is widespread and diverse. For example, among motor carriers, by far the largest group of companies regulated by the PUC, the standard complaint is that there isn’t enough regulation: It’s too easy to get a certificate, and there isn’t enough rate enforcement.

Young Brothers, as we’ve seen, complains that it’s held to a different standard than its competitor – much the same complaint Hawaiian Telcom representatives make privately about its competitors.

It’s within the electric sector that we see the most complaints: that the PUC is too cautious, that the consumer advocate is too closely aligned with the utility, and that the PUC chair should be more of a vanguard. Almost all this criticism, though, comes back to those two words: slow and inefficient. Most of the complaints are justified, but that’s not the whole story.

For example, not everyone is convinced that the commission is responsible for many of these problems. Carl Freedman, an electric utility regulatory expert and frequent intervener before the commission, notes that, under the Caliboso administration, the PUC undertook an enormous number of major policy dockets. In fact, it’s largely trying to deal with those energy-policy initiatives that accounts for much of the commission’s slowness. “I think it’s a fair criticism of the PUC to say it’s not fast enough,” Freeman says. “But I don’t think that equates to criticism of (Caliboso), or even the staff. That’s a criticism of the whole state.”

Similarly, Freedman isn’t sure that slow and cautious are necessarily bad things, at least when it comes to these major policy decisions. “Some people want to see the commission be more of a vanguard. But I think cautious is certainly also one of the things we want the PUC to be.”

Caliboso also isn’t convinced that the charges of slowness and excessive caution are merited. Some of the slowness, he points out, is built into a fair and deliberative process. “You can’t really say this docket took a year, so it’s slow, for example. You really have to look at each one to see when the parties were really done with it, when was it submitted for a decision. A lot of times, it’s the parties involved in the case that slow things down, because they want time for things like review and discovery before they submit their positions and make their arguments. And all that takes time.”

Caliboso also points out that sometimes the PUC’s new responsibilities conflict with its traditional regulatory role, particularly in the complicated field of energy policy. “If you’re assuming the complaints are that we’re not moving fast enough or far enough in a particular policy direction, then you really have to look at what is the policy direction being given to the PUC from the Legislature, because we’re a creature of statute. The law says we’re supposed to be a traditional regulator. Those duties deal with trying to make sure the rates that customers pay are reasonable – so, keeping costs down. And then, we’re responsible for making sure the utilities provide reliable service and earn a reasonable rate of return. It’s all connected.

“At the same time, you’re telling the commission to try to implement these new energy policies, which should help get us off of fossil fuels, improve our energy security, reduce greenhouse emissions, improve our environment and make things more sustainable. That’s fine. I understand that task, and we’re driven to implement these policies. But those traditional regulatory responsibilities have not gone away. So, when somebody says we’re not going fast enough, maybe it’s because we still have those traditional objectives to look out for.”

Buying a Plan

The real issue is money. The PUC is mostly funded by fees collected from the utilities it regulates. This special fund should be more than adequate for the commission’s regulatory duties, but it doesn’t actually get all the money.

“In 2009, we collected $17.6 million in revenues, most of which are from the public utilities,” Caliboso says. “At the same time, our expenditures were only about $8.2 million, $2.9 million of which went to the consumer advocate. That means about $9.4 million went back to the general fund. So, the money is there. The problem, as far as money goes, is that a lot of it is being used for something other than regulatory purposes.”

Money also plays a role in another challenge facing the commission: attracting quality staff. PUC positions go unfilled for so long partly because the pay isn’t competitive with private industry. As one industry insider put it, it’s not uncommon for commission attorneys to be sitting across the table from utility attorneys making four or five times more money. This is a national problem, but, even so, according to Sen. Baker, the disparity in Hawaii is larger.

“We did a study where we looked around the country,” she says, “and other state salaries, almost without exception, are higher than ours.” Similarly, other states pillage utility commission revenues, just not so wantonly.

Utility professionals routinely complain about the underfunding of the commission. In her 2004 report on the PUC, the state auditor recommended the commission undertake serious strategic planning, pointing specifically at the agency’s deficiencies in personnel management. In 2006, the Legislature passed Act 143, which required the PUC and the consumer advocate to prepare a reorganization plan specifying their budget, resource and manpower needs. The following year, Acts 177 and 183 approved and funded most of the commission’s requests. The PUC’s reorganization plan included:

• Increasing the staff level to 62 for the PUC and 15 for the Division for Consumer Advocacy;
• Redescribing several positions to better reflect new responsibilities;
• Restructuring the agencies’ hierarchy to improve organizational effectiveness, especially by creating an Office of Policy and Research to better address highly technical policy issues; and 
• Relocating the PUC offices to accommodate the larger staff and new organization.

Nothing happened as planned. In 2008, the Legislature reduced the commission’s budget again, removing nine existing positions, and not funding two new positions or the agency’s relocation. The following year, the consumer advocate lost eight positions and other new positions went unfunded. Yet, even with funding and legislative approval, the commission still can’t reorganize on its own. It needs approval from the Department of Budget and Finance to release the funds, and the Department of Human Resources and Development has to rewrite job descriptions. Both departments presented roadblocks to the PUC’s reorganization.

Finally, in the 2010 session, the Legislature relented, passing Act 130, which acknowledged that the PUC’s reorganization was essential, especially to “successfully implement meaningful energy policy reform.” Act 130 puts numbers to that, noting that the commission regulates “electric and telecommunications services worth between $3 billion and $4 billion annually.” The legislation also notes that the potential savings from appropriate regulation may save the state more than the cost of fully funding the reorganization. Put another way, a well-run PUC is good business.

Caliboso highlights the value of effective regulation differently. “Another way to think about it is to look at how much is being invested in energy,” he says. “The cost rate base for the utility – or the money they’ve invested in energy infrastructure – is almost $2 billion.” Viewed in the context of protecting that investment, the PUC budget starts to look trifling.

Similarly, Caliboso says, you can look at the state’s regulatory costs in comparison with the aims of the state’s Clean Energy Initiative. “When you think of how much we should be investing to achieve our policy goals of getting us off oil and achieving energy security, which could help both in addressing price volatility and in securing our supply of energy, the cost of (better regulation), that’s not that much more to invest.”

More of the Same?

The remarkable thing about this ebb and flow of funding is that the PUC’s reorganization isn’t controversial. “Everyone knows it should happen,” Freeman says. “Everyone agrees. Everyone is supportive.” But he acknowledges that might not be enough. After all, he points out, funding for the reorganization has been given and taken away several times. “The question is: Is the Legislature just going to wipe it out again?”

     Last month, Gov Neil Abercrombie nominated Rep. Hermina 
     Morita, as the new PUC chair.
     Photo: Courtesy of Representative Hermina Morita

Gov. Neil Abercrombie seemed to address some of these questions in February by appointing the former chair of the House Committee on Energy and Environmental Protection, Rep. Hermina Morita, to the commission, filling the seat vacated by Leslie Kondo, and replacing Caliboso as chair.

Morita had long been the most knowledgeable supporter of renewable energy in the House and a vocal advocate for increased PUC funding. Even so, it’s not clear the PUC’s reorganization will survive the legislative session. “I would like to say, ‘Yes,’ ” Morita confided, shortly before her appointment, “but I’m only confident if the other legislators fully understand that this is a critical part of our economic recovery and our economic development.” 
In fact, Morita’s appointment may add to the uncertainty surrounding the reorganization. Although she’s widely admired among PUC observers, particularly those in the energy sector, her departure from the House will deprive the commission of a powerful legislative advocate at a critical moment. She may also stir things up within the commission itself, where, as chair, Morita will have an opportunity to reshuffle PUC staff.

Some legislators simply aren’t convinced that the commission is properly structured in the first place. “I just don’t think we have the appropriate expertise on the PUC,” said Baker, shortly before Kondo’s departure. “We have two government attorneys and one private-sector attorney. We don’t have anybody with any kind of engineering expertise, accounting expertise, or financial or business expertise. We don’t even have anybody with any energy background. They don’t have to have worked for a utility, but just to understand some of the technical dynamics.”

Baker is also concerned about the PUC’s demographics. “I don’t want to impugn the background or integrity of anybody, but the commission just is not diverse. For example, there are no members from the Neighbor Islands.” She acknowledges that the addition of Morita, who is from Kauai, will alleviate some concerns, but she believes the PUC needs structural changes.

Which brings us back to the PUC’s Pasha decision. In the wake of the flack following that ruling, Baker has proposed legislation that will further complicate the PUC reorganization. “I have a bill that tries to professionalize the staff and adds two more commissioners, so there would be a total of five,” she says. This would simplify adding a requirement that the commission include Neighbor Island representation. And, according to Baker, it would also allow PUC staff to specialize. “The bill also creates two panels,” she says. “One to deal with energy and private water systems – because that’s a big piece of what the commission does – and the other would deal with water carriers, motor carriers and warehousing. That way, you’ve got some specialization, so both the commissioners and the staff can zero in.”

It seems like a good plan. But you have to wonder if the added uncertainty introduced by the bill will kill the PUC’s reorganization in the Legislature again. That’s a fate Caliboso knows is all too possible.

“Is it a done deal, pau, don’t worry about it?” he asks. “No, they could always take it away again.”

 

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Hawaii Employee Retirement System: Underfunded by $7 Billion

BY DENNIS HOLLIER

The state got just what it was expecting in its Christmas stocking. Unfortunately, it was another lump of coal – more bad news about the state of Hawaii Employee Retirement System, which covers both state and county employees. In its five-year report, the actuary firm of Gabriel Roeder Smith & Company claims the system’s future liabilities now exceed the assets set aside to pay for them by $7.1 billion. That’s nearly $5,500 for every man, woman and child in the state.

Worse still, because of the arcane rules governing actuarial accounting, those figures don’t fully incorporate the system’s huge market losses in 2008 and 2009. Consequently, an additional $1.5 billion will be added to the state’s unfunded liability over the next two years. This means the state’s legally required contribution to the pension system will increase to more than $671 million a year by 2015.

The actuary’s findings were hardly a surprise to those familiar with the state’s pension system. In fact, Wes Machida, the conscientious new ERS administrator, spent much of the holiday season playing Grinch, briefing legislators and members of the incoming administration on what to expect in the report.

 

ERS's III, 721 members include all qualifies state and country employees

    Pension benefits for state and county workers, once earned,
are guaranteed by the state constitution; they cannot be
reduced even in a budget crisis.

 

One of the most remarkable aspects of the current shortfall is how quickly it has grown. As recently as 2000, the pension system covering government workers for the state and Hawaii’s four counties was 94 percent funded. This year, by some measures, the funding ratio has declined to less than 60 percent, and the prospects for paying down the deficit appear more and more remote.

 

There are a couple of factors behind the relentless growth of the pension liability. The first is that, like most state retirement systems, the ERS is a defined-benefit system. In other words, state and county employees are guaranteed set benefits when they retire, based on how many years they have worked and their average salaries at the time of retirement. In addition, those benefits, once earned, are guaranteed by the Hawaii Constitution; they cannot be reduced, even in response to a fiscal crisis such as the state’s recent budget shortfalls. This is typical of defined-benefit systems. In 1979, when New York City went bankrupt, it reneged on hundreds of millions of dollars owed to contractors and bondholders, but never failed to make pension payments to retirees.

 

To pay for these enormous liabilities, the ERS – again, like almost all state pension systems – is a “pre-funded plan.” In theory, enough assets are set aside and invested each year to generate income to offset future liabilities. A pension is said to be “fully funded” when current assets are projected to pay for all future liabilities. Funding comes from three sources: employee contributions, employer contributions and interest earned on the system’s assets. Each contributes to the shortfall.

 

Increase in ERS membership

      Click to enlarge image.

Digging a Hole

In Hawaii, employee contributions are set by law at around 12 percent of payroll for firefighters and police, and 6 percent for other employees. According to Machida, employee contributions amounted to $361 million in 2010, which included $187 million in one-time payments as members changed plans within the system, leaving $174 million in normal employee contributions.

The amount paid by state and county employers is also governed by statute, which prescribes an “actuarially required contribution,” or ARC, sufficient to fully fund the system within 30 years. As lifespans have increased and payrolls have expanded, the counties’ and state’s required contributions have soared: In 2000, the ARC was about $175 million; by 2010, it had reached more than $550 million – $400 million for state employers, and in excess of $150 million for the counties. Even so, the unfunded liability has grown.

The system’s investment earnings scenario isn’t any rosier. Here, too, state law predominates, setting the pension fund’s anticipated rate of return on its investments at a robust 8 percent. But this number has little bearing on the system’s actual earnings. In the past 10 years, returns only reached as high as 8 percent four times. In fact, the system’s market earnings over the past decade have averaged only 2.8 percent, not even keeping pace with inflation. With such inflated earnings expectations, not only is income overestimated, but future liabilities are underestimated.

Assuming Liability

Employer contribution in millions

     Click to enlarge image.

There are, in fact, a slew of other actuarial assumptions that affect the size of the pension system’s liability. For example, Machida notes, the system assumes an average life expectancy of 83 years. Every year, though, actual life expectancy increases. “The average life span of a female schoolteacher is over 90 years,” Machida says.
Other assumptions are more financial. “For example, there were more promotions than expected,” Machida says. “Salary increases were projected at 3 percent or 4 percent; but professors, for example, at one point were given a 9 percent to 11 percent raise. Police officers were getting a 9 percent raise.” Similarly, more benefits were added to the pension system without consideration for how we would pay for them. It will be hard to get back these costs.

Distressingly, most strategies to address the system’s weaknesses hinge on manipulating some of these manini-seeming assumptions: extending the age of retirement; changing the definition of “base pay”; changing the way cost-of-living allowances are calculated. Because the benefits of retirees and existing employees are protected by the state constitution, any changes can probably only apply to new hires. That means the cost of addressing the system’s long-term liability will have to be spread over a small pool of members.

Annual pension payments in millions

     Click to enlarge image.

 

Machida says these assumptions aren’t the main reason the state’s unfunded liability has grown so dramatically. He ascribes most of the increase to an old rule that allowed legislators to seize any annual earnings over 8 percent and apply them to the state’s ARC. In 2001, the worst year, the state used approximately $150 million of these “excess” earnings to help balance the budget. Between 1999 and 2003, according to Machida, more than $350 million in excess earnings were diverted from the pension system. “In 2004, with the assistance of (then) Governor Lingle, we introduced legislation to take that away,” Machida says. But the damage has been done. “If that money had not been taken,” he says, “the system today would be almost fully funded.”

Whatever the proximate causes of the pension-system shortfalls, the effect is a vicious circle: When current income and contributions aren’t enough to pay current benefits – a condition that began in 2006 and is projected to accelerate rapidly for the next five or six years – the only option is to sell off portfolio assets to cover the difference. In 2011, the ERS is projected to cannibalize nearly $200 million in portfolio assets; by 2020, that figure could reach $600 million a year. That’s the opposite of a “pre-paid pension fund.”

How to Fix It

Fixing this problem is going to take time. The formula, according to Machida, is straightforward. C+I=B: contributions plus investment earnings must equal benefits paid. To make that equation balance, each variable will have to be tweaked. First, the employer’s contribution must increase. “This isn’t an option,” it’s a necessity, Machida says. Failure to comply with state law would have disastrous effects on state and county bond ratings.

The scale of the increases necessary will be painful. The recent actuarial report by Gabriel Roeder Smith already raises the ARC to 19.7 percent of payroll for firefighters and police, and 15 percent for general employees, which should yield $671 million a year by 2015. Even that won’t be sufficient. To generate the extra $182 million needed, the actuaries recommend increasing those figures to 27.3 percent and 18.8 percent, respectively, which will yield an additional $43 million. The ARC already constitutes about 10 percent of the state’s general fund budget; it’s hard to see where the additional revenue will come from to pay for the increase.

Dollars contributed to the plan in FY 2010

The interest variable in the pension equation also comes into play in the actuaries’ calculation. By assuming an additional 1 percent yield on the system’s investments, they add another $117 million to the pot. (Although they don’t mention it in their report, raising the assumed rate of return also lowers the current unfunded liability.) But, as Machida points out, raising the targeted investment return comes with higher levels of risk, which further could jeopardize ERS assets.

In fact, making up the state’s unfunded liability on the left side of the pension equation is probably impossible in the long term. That means legislators are left with the politically difficult option of reducing retiree benefits. Machida outlines the possibilities:

• Raise the retirement age;
• Increase the number of years it takes employees to become vested;
• Change how final salaries are calculated; and
• Constrain future payroll growth.

Some version of all of these reductions will likely be necessary, but can the Legislature make them happen?

Estimated yields based on actual and market value of assets

     Although, by statute, the ERS assumes its portfolio will earn 8
percent annually, its actual performance has been erratic at best.
Since 2001, market earnings have averaged only 2.8 percent.
 Click to enlarge image.

To begin with, as Machida points out, the benefits of existing employees are protected by the state Constitution. That means new hires will likely bear the brunt of any changes in benefits. Calvin Say, the longtime Speaker of the House, acknowledges the challenges faced by the Legislature. “I’ve introduced a number of bills to deal with the unfunded liability,” he says. “One that I had was to increase the retirement age from 55 to 60 so you can contribute to the trust fund longer. But you can’t address these changes with present employees. You can’t change this for the current retirees. It’s all going to be based on new employees.”

Kalbert Young, the Abercrombie administration’s incoming director of the state Department of Budget and Finance, makes much the same point. “I would say that the governor is interested in looking at what are the available means for resolving the liability issue,” he says. “Admittedly, though, it’s a very big number; and given the condition and depth of the problem, our timeline for resolving it may not be in the near term.” In other words, future state and county employees will be paying the tab for generations.

EUTF fond in even worse

That’s assuming today’s politicians can enact the necessary changes. Machida points out that, because they will likely only affect new hires, any prospective reduction in employee benefits are probably not subject to collective bargaining. Nevertheless, it’s difficult to envision the Legislature enacting major reductions without at least the tacit support of the public unions, by no means a sure thing. House Speaker Calvin Say remarks on how difficult it’s been trying to make these kinds of changes in the past: “For me, it’s been a sincere effort to try to control both the employers’ and the employees’ contributions,” he says. “But present employees do not understand that. They don’t want Calvin Say to force them to pay more for their pension contribution. But something’s got to give.”

Say remains optimistic. “Overall, I feel very confident, because, at the end of the day, the state government is obligated to fulfill its responsibility. So, yes, we’ll address that unfunded liability one way or the other. It will probably be through the guise of taxation.”

The Big Picture

“But time is of the essence,” says Machida. That’s because, as glum as the Gabriel Roeder Smith report seems, it may still understate the size of the problem. To understand why, it helps to put Hawaii’s retirement system in a national context. Since 2000, the number of states with fully funded pension systems has declined from 26 to four, according to a recent report by the Pew Center on the States. Hawaii is in the bottom quartile, one of 19 states described as having “serious concerns.” Remarkably, Pew data do not even include the effects of the Great Recession of 2008. Once those losses are incorporated into the picture, the perspective will be much worse.

Despite its baleful conclusions, the Pew report is squarely in the mainstream of actuary standards. It relies on the states’ own analyses and draws its conclusions using normal actuarial accounting procedures. There is a growing number of analysts, though, who believe that traditional actuarial accounting and its assumptions are part of the problem and help mask the true scale of the states’ pension crises. The most inflammatory of these is Joshua Rauh, a researcher at Northwestern University’s Kellogg School of Management, whose 2010 report suggests the states’ total unfunded liability may be several times larger than the findings in the Pew report. For example, he predicts Hawaii’s ERS will go broke in 2020.

Not surprisingly, Rauh’s conclusions have been largely discounted in the public pension community. “Among public pension actuaries,” says Keith Brainard, executive director of the National Association of State Retirement Agencies, “I think you would find the overwhelming perspective that Joshua Rauh’s findings and recommendations are inappropriate.” Even ERS administrator Machida – by no means an apologist for the status quo – downplays Rauh’s conclusions: “The ERS is not going to run out of money in 2020.”

But Rauh isn’t alone in raising questions about the size of the unfunded liabilities facing state pensions. For example, Andrew Biggs, of the American Enterprise Institute, uses a standard financial process called “options pricing” to reach much higher figures. In the case of the Illinois State Employees’ Retirement System, his analysis more than doubles the state’s total liability, from $23.8 billion to $47.3 billion.

Applying the same formula to Hawaii’s total liability swells our unfunded liability from $7.1 billion to more than $14 billion. Of course, the calculation isn’t that simple. It’s worth noting, though, that even pension actuaries are beginning to look at other ways of measuring pension liabilities. All of these suggest that our total liability is higher than the $18.8 billion actuarial valuation in the Gabriel Roeder Smith report. Rauh, basing his discounting rate on 30-year Treasury notes, calculated Hawaii’s total liability at $24.2 billion. The state’s own actuaries calculated a total liability of $21.5 billion when they used the market value of assets instead of the traditional actuarial method. Pessimism is clearly becoming part of the mainstream.

In fact, the actuary’s report to the ERS board in December included some startling language. Under the heading, “What does this all mean?” the report states: “If the assumptions are met for all years beginning July 1, 2010, and the current contribution policies remain, the system is not expected to run out of money. But it is very close.” (Italics added.) Worse still is how long the actuary says it will take to fully fund the system, given the same set of assumptions: never.

Pension Benefits

In FY 2010:

$925 million was paid by the plan to about 39,000 retirees and beneficiaries.

 

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Marketing Hawaii to the World

BY DENNIS HOLLIER

      The Hawaii Tourism Authority’s VP for Brand Management, 
      David Uchiyama, is a numbers man. Under his leadership, 
      the state’s international marketing strategy has been 
      increasingly driven by good data.
      Photo: Irwin Wong

Tokyo, Japan —

High on the stage of the Hawaii booth, overlooking the hubbub of Japan’s biggest travel fair, the musical group Manoa DNA launches into “Aloha You, Aloha Me.” It’s a catchy tune, sung mostly in Japanese, that has become the band’s signature song here in Japan, and the smiling, enthusiastic crowd gathered at the foot of the stage seems to know all the words.

The group’s performance brings business at the neighboring booths to a standstill. At the Canada booth, instead of watching videos of Nova Scotia on giant plasma screens, visitors swivel 180 degrees to watch the band and clap to the music. The Japanese women hosting the Las Vegas booth set down their brochures to dance and sing along. They cheer and flash shaka signs when the song ends. This might be Japan, but there’s a great deal of Hawaii at the Japan Association of Travel Agents Congress and World Travel Fair.

That makes Japan an excellent place to start talking about how Hawaii sells itself to the world. Japan, after all, is our most lucrative foreign market, and three of the most important players in that marketing effort are at the event. On the edge of the crowd is Takashi Ichikura, dapper in an aloha shirt and blazer. Ichikura-san, as he’s known to almost everyone here, is the director and principal owner of Hawaii Tourism Japan, HTJ, the state’s marketing partner in Japan, and the person most responsible for organizing Hawaii’s presence at the JATA fair. At the back of the crowd are the two key players from Hawaii: Hawaii Tourism Authority president and CEO Mike McCartney and his right-hand man, VP for brand management David Uchiyama. 

They’re an odd couple: McCartney, the sensitive, soft-talking former politician; and Uchiyama, the taciturn numbers man and marketing guru. The industry consensus is that their good cop/bad cop routine, the mix of political sensitivity and strategic planning, has been one of the keys to reviving Hawaii’s battered tourism economy. Here’s how they’re doing it.
 

      More than 111,000 people attended the JATA World Travel 
      Fair in Tokyo in September. HTA president and CEO Mike. 
      Photo: Irwin Wong

Old-School Marketing

Even in the digital era, marketing is sometimes just about getting in front of as many people as possible, and the JATA World Travel Fair is one of the largest tourism expositions in the world. This year, 71,740 consumers attended and, more important, so did 39,492 travel agents, tour operators, media and others in the travel industry. That makes the fair an extraordinary marketing opportunity, which is why HTJ invests so much time and money on its booth every year. It still works.

For example, HTJ used a contest at the fair to persuade nearly 5,000 consumers to complete surveys about how they choose a destination. Employing QR codes, the survey provided consumers with a link to HTJ’s new mobile website, resulting in 74,199 hits and 23,712 unique visitors, a 33 percent increase over the previous month. Exposure at the fair also boosted hits to HTJ’s regular website by 69 percent to 1,387,079 during the month. And, of course, tens of thousands of brochures were handed out at the booth, each offering a specific call to action. 

Beyond the raw numbers, the fair also generated the kind of good will that marketers love, even if they can’t measure it. All those people singing along to Raiatea Helm and Manoa DNA are priceless.

Like almost all HTJ programs, the fair also offered marketing opportunities for the state’s travel partners – hotels, wholesalers and attractions that depend on tourism. In fact, six Hawaii-based travel partners paid a nominal fee – helping offset the cost of the event – to have a table at the Hawaii booth. These included the Kaanapali Beach Hotel, Hilton Hawaiian Village and Kualoa Ranch. Travel professionals and consumers file past their tables collecting brochures and listening to the company pitch. HTJ also provides free brochure hosting for companies that can’t come to the fair.

Marketing partners like HTJ provide other essential services, like training and educating travel agents and wholesalers. HTJ, for instance, offers extensive destination training, both online and through seminars it conducts around Japan. Last October, HTJ collaborated with numerous Hawaii hotels and attractions to bring more than 200 Japanese travel agents to the Islands on a familiarization trip – or megafam. It’s much easier to sell a place when you’ve been there yourself. Similarly, in November, the Hawaii Visitor and Convention Bureau, HTJ’s North American equivalent, hosted a small group of travel writers on a trip to Oahu.

 

      Photo: Irwin Wong

The JATA travel fair in Japan is also a good opportunity to see the competition. This year, more than 1,000 delegates from 90 countries gathered at nearly 900 exhibition booths. A stroll through the exhibition hall reveals that Hawaii doesn’t have a monopoly on good marketing ideas.

The Croatian booth, for example, is a collaborative affair, with Croatia’s equivalent to HTA lauding the country as a tourism destination, and its version of DBEDT wooing Japanese investors. (The fair’s organizers awarded the Croatian representatives “best destination marketer” for 2010.) In the Yemen booth, visitors can change into Bedouin garb and pose for photos in an ersatz harem. Mexico, one of Hawaii’s most important tourism competitors, has a spectacular booth with multiple flat-screen displays showing videos of Chiapas, Oaxaca and the Yucatan. Not to be outdone by Hawaii’s performers, Mexico employed a full mariachi band, replete with balladeers and brass.

 Big exhibitions like JATA highlight one of the great challenges facing Hawaii: As a small, island state, we don’t have the financial resources to compete with entire countries such as Mexico or Australia, or large states like Florida or California. Even some cities, such as Las Vegas or Macau, have larger marketing budgets than Hawaii. Industry observers estimate Mexico’s tourism marketing budget at $200 million to $250 million a year. Florida’s destination marketing – split among many agencies – probably totals more than $150 million.

In contrast, the total marketing budget for the state of Hawaii in 2010 was $65 million, which had to filter through HTA, to the marketing partners such as HTJ and the Hawaii Visitors and Convention Bureau, down to the individual island chapters. Most insiders say this simply isn’t enough money. “We ought to be spending about $150 million a year instead of $60 million,” says Outrigger president and CEO David Carey.

Big events like the JATA fair aren’t cheap. It cost HTJ $48,326 just to rent the floor space in the exhibition hall for three days. Building and manning the booth, including the stage and the sound system, cost $111,657. Transportation, accommodations and nominal per diem for the performers ran another $41,350, even though HTJ was fortunate that much of the talent was already in Japan. Roll in HTJ’s staff time to plan for the event and to support the HTA visit, and the tab for JATA approaches a quarter of a million dollars. That doesn’t include the money spent by the travel industry partners or the cost of flying in the HTA board members and staff. There’s no way around it: Big-time marketing is expensive.
 

 

      McCartney spoke at a JATA symposium on how to increase 
      global travel among Japanese people who live outside the 
      Tokyo area.
      Photo: Irwin Wong

 

 

Although Japan is an important market for Hawaii tourism, it’s dwarfed by North America, particularly the U.S. West, which contributed about 2.8 million arrivals to Hawaii last year, more than twice as many as Japan. So, in 2009, when plummeting visitor counts threatened a crisis in Hawaii’s largest industry, it’s not surprising that the marketers looked to the West Coast. In the wake of the loss of Aloha Airlines and ATA, the question for the Hawaii Visitor and Convention Bureau seemed to be: How do we preserve and grow airlift? And from the marketer’s perspective, how do we do that and still maintain the integrity of the Hawaii brand? As HVCB president and CEO John Monahan points out, “We didn’t want to dilute its value, built over decades, by putting ‘Hawaii on Sale.’ ”

 

The Blitz

The answer was “The Blitz.” Jay Talwar, senior vice president for marketing at HVCB, ascribes its origins to a conversation HVCB had with Hawaiian Airlines and its ad agency. “They said to us, ‘What if we focus on one market and just saturate it with a cooperative marketing program?’ And we said, ‘That’s great, but what if we invited everyone – all the hoteliers, the attractions, the travel sellers, all of them – to come and really try to get the tide to rise?’ And Hawaiian was good enough to say, ‘That’s fine. We know we’ll get our share. If the pie grows, our slice grows with it.’ That’s the birth of The Blitz.”

Talwar sketches out the thinking that went into the first trial run: “Let’s say we go to San Francisco for a whole month, and each week, we focus on a separate island.” The key, he says, was, for a month, to make Hawaii “unavoidable in that marketplace.” Doing that meant using every marketing tool available. It meant editorial visits to get the Hawaii story in local media – newspapers, magazines, radio and TV. It meant advertising: They cover-wrapped the San Francisco Chronicle and ran banner pages on its online version, SFGate. They put up billboards along the commuter routes of a demographic their analysis described as the habitual traveler. At night, they had “billboards” projected onto the sides of prominent buildings. They used social media and online contests to publicize special events. All of that drove traffic to the website of HVCB or an island chapter or a travel partner. “Basically, we did everything that you would do in Marketing 101,” Talwar says. “We just did it all at once.”

      Several HTA staff and board members also attended JATA, 
      including the new chairman, Atlantis CEO Ron Williams 
     (center.) The Hawaii booth at JATA is always an elaborate 
     affair, although HTJ has reduced its size in recent years due 
      to declining attendance at the travel fair.
      Photo: Irwin Wong

 

For later blitzes in Seattle, Los Angeles and again in San Francisco, HVCB fine-tuned its approach. In coffee-mad Seattle, marketers handed out free coffee to early morning commuters on the ferries, each week featuring coffee from a different Hawaiian island. The pitch: “You can actually go visit the farm where this coffee was raised. You can’t do that anywhere else in the United States.” Similarly, the second blitz in San Francisco took advantage of the city’s reputation as a culinary capital. “This time, we had a few guys with us named Roy and Alan and DK,” Talwar says. “It’s now connected with chefs and the farm-to-table movement. Now, we’re talking to San Franciscans in a language they understand. That got us a lot of great coverage in the local media.”

It worked. “We began measuring results 30 days out,” says Monahan. The steep spikes in visits to the HVCB website after the blitzes are unmistakable signs of marketing success. Perhaps a more meaningful measure is the level of participation among the travel industry partners. Monahan points out, “At one point, we had brand X; then X and Y; then X, Y and Z. Now, they all want to know as far in advance as possible what our blitz schedule is going to be so they can work that into their plans.”

The travel partners are more direct. “We use two metrics to measure marketing success,” says Jack Richards, CEO of Pleasant Holidays, the largest travel wholesaler to Hawaii. “One is brand awareness; the other is sales or passenger volume. And from our perspective, the blitzes have been tremendously effective on both fronts.” He also remarks on one of the keys to that success: Much of the money to pay for the blitzes comes from private industry. “You’ve got to understand that suppliers like me, we spent millions of dollars in matching funds to help drive visitors to the Islands,” Richards says. Exactly how much is difficult to ascertain, but, HVCB’s Monahan says, “We know the funding spent by these partners is a multiple of what we spent.” And HVCB has been spending between $1 million and $2 million per blitz. 

Beyond Marketing

Much of what makes marketing work isn’t the flashy media campaigns or public relations bonanzas; it’s what happens quietly in the background, and one of the keys to the recent successes of HTA and HVCB is their growing use of data. While the whirlwind nature of the blitzes makes it seem like those decisions were made by the seat of the pants, in reality they were grounded on hard numbers. The target cities were chosen because the data showed they accounted for more than half of Hawaii arrivals. Just as important, as HVCB’s Talwar points out, most U.S. East Coast visitors also pass through these cities, so it’s critical that marketers preserve as much airlift from them as possible. “Protecting the West Coast hubs allows us to protect our East Coast markets as well,” Talwar says.

Similarly, good strategic data was behind almost all the tactics used in the blitzes. Extensive consumer surveys allowed HVCB and its ad agency to craft advertising and public relations material based on the lifestyles and interests of the target audience. Demographic data and customer profiling helped identify appropriate media outlets and event locations. Social media allowed the marketing professionals to track the effectiveness of blitz activities in near real time. New-age marketing is all about data.

Hawaii’s marketers increasingly rely on sophisticated private-sector specialists to develop and make sense of all these numbers. In addition to DBEDT analysts (who recently moved under the HTA roof), these include companies like Hospitality Advisors, a Hawaii-based company with a global reputation as a strategic tourism consultant; Smith Travel Research, a respected industry consultant providing competitive set surveys that allow HTA and its marketing partners to see how Hawaii tourism is doing compared to its major competitors; and Sabre Airline Solutions, the giant travel conglomerate, which provides critical airlift analysis.

Airlift data is particularly critical for an island destination like Hawaii. Our economy depends on having enough air seats and, as the loss of Aloha Airlines and ATA demonstrated, maintaining that airlift is complicated. As David Uchiyama, HTA’s No. 2 man, points out, prior to contracting with Sabre, the state’s marketers had no idea if an airline’s route was having problems. As a consequence, it had no way of knowing if the airline needed help. “With the use of Sabre Aviation,” Uchiyama says, “we can now look months in advance to see booking pace, what the load factors are, and what’s the average fare they’re charging. Now, we can go to them and say, ‘We see that the route’s not doing so well. How can we support it with some kind of marketing boost?’ ” Those sorts of conversations are now commonplace.

Another quiet factor in the recent success of HTA has been the teamwork of Uchiyama and McCartney. HTA is not without critics, and one of the main complaints has always been that the organization’s structure makes it easy prey to politics. Most industry partners say they would prefer a much tighter focus on marketing, and less emphasis on cultural and environmental programs, and other priorities. (The money to fund HTA, after all, doesn’t come from the general fund; it’s paid by hotel guests through the transient accommodations tax.) So, when McCartney was selected to run HTA, many worried about his lack of a marketing background. Starwood Resorts senior vice president for operations Keith Vieira readily admits he preferred Paul Casey, the other major candidate for the job. “Mike had legislative experience and community experience,” Vieira says. “Paul had industry experience.”

Yet Vieira, like other industry critics, have been pleasantly surprised by HTA’s performance under McCartney. “Looking back,” he says, “I would say Mike McCartney was a very good choice.” Partly, that’s because McCartney has been careful to delegate most of the marketing decisions to Uchiyama, whose marketing background at Starwood puts him in good stead with the industry. David Carey, the CEO of Outrigger and another long-time critic of the politics and organization of HTA, points out, “Under Mike, they have a pretty good team in place. And now David’s so much more involved on a higher level.” Both Vieira and Carey acknowledge that McCartney’s political gifts have been useful, too, and not simply in dealing with the Legislature. In fact, his sensitivity and political skills have probably been most on display internationally, where he’s helped transform HTA’s relationship with key travel partners. The best example may be how the McCartney/Uchiyama team dealt with the loss of Japan Airlines’ Narita-Kona flight.

McCartney tells the story this way: Last spring, after losing money on its Narita-Kona route for years, JAL announced it was shutting the route down. For Kona, the result would be devastating, not only because Kona would lose a steady stream of lucrative Japanese visitors, but because, besides Honolulu, Kona is the only international point of entry for the state. Without JAL’s international arrivals, TSA would likely close its temporary facilities there, probably for good. With that in mind, the next time he was in Tokyo, Uchiyama paid a visit to Sunichi Saito, then JAL’s executive officer for passenger sales and marketing. He asked Saito a simple question: “How can we help?”

Those four words changed everything. The next day, Uchiyama was summoned to JAL headquarters to meet with Kiyoto Morioka, JAL’s VP for international passenger sales. “We’ve been flying to Hawaii for 55 years,” Morioka said in astonishment. “This is the first time anyone’s asked us that.” What ensued was a frenzied effort by JAL and tour operators in Japan, and HTA, the Big Island Visitor Bureau, and travel industry partners here to work together to develop marketing and promotional campaigns to create enough demand to sustain the route. This unprecedented cooperation succeeded in raising JAL’s load factor by more than 20 percent – not enough, ultimately, to preserve the route (as part of its bankruptcy restructuring, JAL shuttered 40 percent of its international routes) – but enough to set a new tone in the relationship and create a model for how to market in the future.

That same sensitivity to the needs of travel partners was on display during a string of courtesy calls made by the HTA entourage after the JATA travel fair. Over the course of a day, Ichikura-san chaperoned McCartney, Uchiyama and the HTA board members through a string of corporate offices around Tokyo. Along the way, they visited with executives at airline partners, such as JAL and Delta; at major travel wholesalers, such as JTB and JALPAK; and with trade organizations like JATA and the Japan-Hawaii Tourism Council. These meetings, as you would expect in Japan, were frequently formal and stylized. They were also surprisingly candid, with each side volunteering inside information about corporate strategy or political challenges, swapping industry rumors, and asking for opinions and advice.

In the end, it always came down to those four words: How can we help?

During one of the symposia at the JATA conference this September, McCartney sat on a panel that discussed how to get more Japanese from beyond Tokyo to travel abroad. But, seeing JAL VP Kiyoto Morioka in the audience (a courtesy in itself, since the audience was mostly midlevel managers), McCartney took a question about how low-cost carriers were going to affect the market, and he turned it inside out.

“We appreciate all airlines,” McCartney said, nodding to Morioka, “but we want to say a special aloha to Japan Airlines. Your Kona flight did very well for many years. But, because of the downturn in the world economy, you came to us to apologize that you could no longer fly to Kona. You showed us pictures of your trips to Hawaii when you were a child and told us how important Hawaii was for you. We will never forget that. We’ll never forget the commitment that JAL has for Hawaii. And I wanted to say, ‘We’re the ones who should be apologizing for not coming to you sooner to help.’ Thank you so much for all you’ve done for Hawaii.”

When McCartney finished, Morioka and his small entourage of JAL executives stood and bowed deeply.

Which media produce results in Japan

Click to enlarge image.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of mainland “blitzes”

Click to enlarge image.

 

Marketing “blitzes” in key Mainland cities generated lots of traffic to the GoHawaii website. For example, the June blitz in Los Angeles drove that city’s share of all traffic to the website from about 6 percent to 20 percent. Perhaps more important, Los Angeles’ interest in Hawaii after the blitz seems to have what marketers call a “long tail.” 

 

Where HTA spends its marketing Dollars

Click to enlarge image.

 

 

 

 

 

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