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A Honolulu Fire Department fund meant to collect public payments for fire plan reviews related to the city's building code is non- transparent to the public it serves, the Office of the City Auditor says.
In an audit report issued in August, the City Auditor asserts HFD'S Fire Plans Review Revolving Fund, or FPRRF -- established and created via a 2012 city ordinance as a repository for fire plan review fees -- does not have adequate safeguards in place, as required by city law, to prevent fraud, waste or error in the use of public funds.
By city law, the fire plans review fee is required to earmark 10% of the building permit fee payable to the City &County of Honolulu.
In turn, those collected monies may be expended for HFD's fire prevention activities relating to public education, fire investigations, plans checking, permit processing, fire inspections, certifications and training.
But in an Aug. 22 letter to the mayor and Honolulu City Council, Acting City Auditor Troy Shimasaki said his agency found that over a five-year period, from fiscal years 2020 to 2024, the fire department's FPRRF "is not structured or administered in accordance with city ordinance requirements."
"Ordinance 12-4 required that the city establish a revolving fund to receive and disburse fire plan review fees," he wrote. "Instead, the fees are deposited and managed within the city's Special Projects Fund, which was designed for state contract revenues and does not provide the safeguards and review requirements for revolving funds."
He added, "The Special Project Funds structure limits transparency and oversight, and leaves critical financial information -- such as fund balances, revenues, expenditures, and staffing decisions -- unreported to the (City Council)."
Shimasaki noted his office determined "HFD relies significantly on the fund to supplement its operations."
"We found that between 12 to 19 percent of annual Fire Prevention Bureau (FPB) spending between (fiscal years 2020 and 2024) was paid from the FPRRF, which occurred outside the city's annual budget process," he wrote.
"During this period, HFD added unbudgeted staff and maintained between 4 and 9 staff annually, and spent nearly $1 million on unbudgeted equipment purchases without Council oversight or approval," he said.
He added "inconsistent accounting and the absence of clear reporting led to conflicting assessments of whether the fund operated with a surplus or deficit in multiple years."
In response to the audit's initial findings, HFD Fire Chief Sheldon K. Hao noted his department understood the use of the FPRRF.
"We recognize this audit provides the HFD with an opportunity to reflect on our collective efforts," Hao wrote in a July 25 letter to the auditor. "We will continue to look inward and identify areas of improvement, celebrate our successes, and learn from our mistakes."
To that end, the audit -- initiated via a Council- approved resolution in January, and performed from February to June -- highlights apparent discrepancies in the use of fire plan funds, including special fund purchases in which $984,527 in fire plan review fees paid for unbudgeted equipment purchases.
Some unreported equipment that used special funds were for passenger vehicles at $121,447 (using five-year totals); $70,403 for scientific equipment; $509,400 for work tools; and $283,277 for containers purchased over 15 years, the audit indicates.
The FPRRF also created unreported staffing positions at the fire department, the audit states.
"During this period, the department requested 41 positions to support FPB operations," the report states. "The City Council approved and appropriated about 41 to 43 positions annually."
But by using fire plan review fees, the audit asserts HFD created and supported additional FPB positions. Each year, FPB spent general and special funds to maintain 45 to 52 positions.
"The fees collected helped the department increase FPB staffing ... averaging a 16% staffing increase, without City Council review and approval," the audit states. "This unbudgeted staffing information is not included in annual budget reports."
According to the audit, for fiscal years 2020 to 2024, the FPB spent $2.02 million on salary-related costs.
The audit found approximately $500,000 in special funds were used for non- holiday overtime, including $356,911 over the five-year period; stand-by pay at $140,567; and provisional costs for retirement payout of accumulated vacation pay, pegged at $2,575.
Internal knowledge of the FPRRF -- particularly over how much money was actually accounted for within the fund by HFD -- was also highlighted.
The audit notes, for example, that there are two years -- fiscal years 2020 and 2024, respectively -- where there is disagreement between HFD and the city's executive budget books as to whether there was an annual deficit or surplus.
"FY 2020 appears to be a nearly break-even situation when comparing accounting," the audit states. However, "FY 2024 has a huge disparity of approximately $427,000 in whether it was a net revenue year or the largest annual deficit year in our review."
During fiscal year 2024, the FPRRF received revenues of over $1.14 million, and spent more than $1.08 million, the audit states.
During the same time period, FPB spent over $7.21 million -- an amount comprising over $5.97 million from the city general fund and over $1.24 million in Special Project Fund monies.
The audit's other key takeaways include:
>> Revenues have been increasing throughout the five years reviewed. They are also projected to increase to approximately $1.5 million and $1.1 million for fiscal years 2025 and 2026.
>> There has been fund spending of at least $684,597 per year, with two years over $1 million.
>> More was spent than annual revenues collected, a ratio of $1.02 spent per $1 collected.
>> Annual spending deficits in three of five years.
"While the department generally complied with the fund requirements, we could not definitively determine whether $157,175 in expenditures were directly related to fire prevention activities," the audit states further.
"Over the past five years, about 80% of Fire Plans Review Fee revenues collected went toward salaries and other day-to-day costs, including $1.35 million for personal services contracts (PSC)," the audit asserts. "While many of these expenses may be related to fire prevention work, the department does not break down, justify, or report how the fund is being used."
The audit report ultimately makes three recommendations that include:
>> Having the city Department of Budget and Fiscal Services formally establish the FPRRF as authorized by Ordinance 12-4.
>> The Council should consider amending Ordinance 12-4 to remove the "appropriated upon receipt" clause, which would make the FPRRF subject to Council oversight.
>> And HFD should establish appropriate policies and procedures for administering the Fire Plan Review revenues and receipts, and prepare an annual report of fund activities for the City Council.
Meanwhile, the city audit noted even if HFD implemented the auditor's recommendations the revolving fund itself is inherently flawed.
"A 1993 Legislative Reference Bureau study identified two main concerns about revolving funds," the audit cites. "One issue was that a department or program could have revenues exceeding expenses, or vice versa, violating the fund's definition."
"The FPB, partly funded by revolving funds, experienced both situations during the review period," the audit reports. "In three of the five years reviewed, annual fiscal deficits occurred, with spending exceeding revenues, which will be detailed below."
A second concern was raised about agencies using revolving funds for general fund-related activities instead of specific activities.
"This can reduce legislative oversight by providing independent fiscal support," the audit states. "This issue is relevant to the department's use of plan review fees for FPB activities, as they currently do not need to budget, justify, or report these funds in the City Council's annual budget review, except for the plan review fund."
In his July 25 letter, Hao said his department would "coordinate with (BFS) on a solution to address" FPRRF issues. However, the fire chief also asserted HFD's goal was to use the FPRRF to increase its "capabilities" in fire prevention.
For its part, BFS claimed it would not formally respond to the City Auditor's reported recommendations, yet offered one of its own.
In an Aug. 8 response to the audit, BFS Director Andy Kawano wrote HFD should "prepare an annual report on the activity of FPRRF" and present it to the Council's Budget Committee, during a future informational briefing.
He also asserted that although a past Council had adopted Ordinance 12-4, which authorizes the establishment of the FPRRF, "prior administrations never established it."
"While we are uncertain as to why, a supposition may be made that Ordinance 12-4 allows the funds to be automatically appropriated for the allowed use," he wrote.
And he added that use of the city's Special Projects Fund -- deemed a revolving fund -- meant the fund balance will roll forward each year.
"The carry-forward in a self-appropriating fund is rollover of unused appropriations from prior years and it increases and decreases each year based on current year activity," Kawano wrote. "Therefore, there is no risk of HFD overspending from inception date."