For two decades, Hawaiʻi’s Deposit Beverage Container program has been run as an “honor system,” reliant on unverified self-reported data and plagued by alleged fraud, State Auditor Leslie Kondo told a state Senate committee during an informational meeting Thursday.

Established by the state Legislature in 2002 and administered by the state Department of Health’s Office of Solid Waste Management, the deposit beverage program places a 5-cent deposit on most beverage containers. Distributors pay the deposits to the state and the funds are reimbursed to consumers when they return the containers to certified redemption centers.

There are a half-dozen recycling centers on Maui as well as facilities on Lānaʻi and Molokaʻi.

The beverage recycling program’s aim has been to reduce litter and encourage recycling statewide. According to the department, the program has helped residents recycle more than 10 billion containers since its inception.

The State Auditor reviews the beverage recycling program every two years and has continuously noted problems with the “honor system,” accountability and fraud.

“Our prior reviews have repeatedly raised concerns that DOH’s reliance on self-reported information from beverage distributors and redemption centers increases the risk of fraud,” the current audit says. “Specifically, we have pointed out that distributors and redemption centers have financial incentive to under- or over-report the amounts that the former must pay into the Special Fund and the latter may claim for reimbursement from the Special Fund.” 

The auditor found that the Health Department has not taken corrective action, despite repeated biennial audit findings of deficiencies.

“We repeatedly discovered that DOH had done nothing to address the recurring findings and had not implemented any of the recommendations to address those findings,” it says. “We found that the program viewed these biennial audits as a replacement for internal controls, expecting the auditor to perform the program’s job of reviewing records and conducting ‘secret shopper’ activities to identify errors in the amounts received from distributors or claimed by redemption centers.”

Now, as the state moves to tighten compliance, a Maui business owner is cautioning that new rules mandating third-party audits of beverage distributors will only punish honest companies.

Garrett Marrero, chief executive officer and co-founder of Maui Brewing Company, testified Thursday before the Senate Committee on Health and Human Services that the program “does not work.”

Marrero criticized the state’s recent move to mandate expensive third-party audits for distributors — a measure intended to address the long-standing problem of unverified data and non-compliance. 

Under Act 12, enacted in 2022, beverage distributors must develop and submit an internal control process for Health Department approval, and they are required to obtain independent audits in odd-numbered years.

Marrero estimated the cost of the audit to his business at $15,000 to $20,000 per location (multiplied by Maui Brewing’s two locations on Maui and two on Oʻahu, $60,000 to $80,000) while his smallest location pays only $48 in annual fees to the program.

“I think this was just an unintended consequence of the legislation, not an intentional hurting of small businessmen,” Marrero said, arguing that the true fraud risk lies with the redemption centers, not the distributors and wholesalers.

Citing one instance of alleged fraud, Marrero said he thought it was a “lack of education and guidance from the department, as opposed to actual criminal fraud,” noting that the business involved is a publicly traded company.

“I would find it very difficult to believe that they’re engaged in some method to defraud the state of Hawaiʻi,” he said.

Act 12 was intended to resolve chronic problems with data integrity in the state’s deposit beverage container program. The law addressed State Auditor recommendations to compel the Health Department to develop and implement robust procedures to verify the accuracy and completeness of data reported by beverage distributors and redemption centers.

The key requirements of the Act are:

• Risk-based audits: The Health Department is required to create a risk-based process to select distributor and redemption center reports for periodic audits, using data analytics and considering factors like transaction amounts and prior findings to target unusual activity.

• Enhanced reporting: Distributors are required to submit detailed monthly or semi-annual distribution reports and supporting records.

The informational briefing, chaired by Sen. Joy San Buenaventura and attended by Sen. Kurt Fevella, focused on the Office of the State Auditor’s latest review of the program for the fiscal year ended June 30, 2024.

Audit finds ongoing fraud and lack of controls

Kondo presented findings consistent across multiple audits since the program’s 2002 inception, stating the deposit beverage container program is “a program in name only” with “very little structure” and “no internal controls.”

Latest audit findings included:

Self-reported data: The Health Department still cannot verify if distributors are paying what they owe, and it reimburses redemption centers based solely on the centers’ own, unverified numbers.

Fraud examples: Kondo detailed a 2016 “secret shopper” exercise by a certified public accounting firm that found what appeared to be fraud at a redemption center in Honolulu. On one visit, the center’s reimbursement request to the Health Department was for an additional $52.48 beyond what was paid to the consumer for 12 bottles. The department referred the matter to the Department of the Attorney General, which took no further action because there were “only two instances.”

Growing fund balance: Kondo reported that between fiscal 2024 and fiscal 2025 the program’s special fund increased by more than $12 million. The program’s special fund as of June 30, 2024, had a fund balance of $77,860,170. The special fund reported total revenues of $33.57 million and total expenditures of $23.03 million.

Fevella, whose wife previously worked at a redemption center, called the program a “failure” and noted that a lack of computerized tracking allows fraud to persist.

“People have been getting rich over the taxpayers’ money,” he said.

San Buenaventura called the Health Department’s lack of staff and reliance on self-reported data “unacceptable” given the sizable special fund that could be used to hire personnel.

Health officials promise improvements, face skepticism

“The Department of Health has faced longstanding challenges in its implementation of the deposit beverage container program,” said Kathleen Ho, deputy director for Environmental Health. “I want to assure you that we are committed to addressing these challenges.”

The director’s office meets twice a month to try to get the program “back on track,” she said. “We are committed to administering the program responsibly and achieving the statutory objectives and to increase recycling.”

Lane Otsu, Solid Waste Management coordinator, said: “We’re working to implement the auditors’ recommendations. We’ve gotten started on much of the actions, and feel that we are making progress and are continuing to move forward.”

The department’s plans for immediate improvement include:

Audits and controls: Finalizing a request for proposals for a contractor to perform risk-based audits on both distributors and redemption centers and to improve the department’s financial control processes.

Compliance: Issuing enforcement letters to the approximately 100 distributors who have failed to submit required internal control process documents.

Technology: Developing an electronic reporting system for distributors and redemption centers to reduce manual data entry and increase reporting accuracy.

Staffing: Advancing a reorganization plan for the Solid and Hazardous Waste Branch to increase program staff, now with nine dedicated employees, despite the auditor’s long-standing recommendation that the program use its large special fund to hire personnel.

Kondo acknowledged the department’s plans, but noted that his office will perform another mandatory audit in two years. He pointed out that his office has been doing “management work” for years because the program lacked structure.

The committee gave the Health Department leeway until the next audit, but San Buenaventura said that after two decades of poor performance with the program, the Legislature will look for improvement in the next audit review.

Otherwise, “the Legislature needs to seriously look at whether or not there’s better recycling programs,” she said.

HONOLULU (HawaiiNewsNow) - Hawaii State Hospital is operating at 30% over capacity, creating a revolving door for homeless people with mental illness who commit minor crimes, officials told state senators Monday.

The overcrowded facility has become overwhelmed by non-violent mentally ill people arrested for minor offenses like sleeping in parks or trespassing. A law enacted five years ago set time limits on how long individuals can be held for evaluation, forcing early releases before treatment is complete.

“They are expedited and they need to be released after seven days,” said hospital administrator Mark Lindscott.

Admissions surge strains system

Hospital admissions have increased to over 600 per year, with two-thirds of patients having been hospitalized previously and at least 22% experiencing homelessness. People being evaluated make up 18% of the patient population.

“We try to connect them with IHS (The Institute for Human Services), other places so that they actually have a good discharge plan and a safe one. They often self-sabotage,” Lindscott said.

The overcrowding prevents people who need commitment but haven’t committed crimes from being admitted.

Prison facilities cannot accommodate the overflow due to inadequate mental health resources.

“We can’t provide a level of care that they need to have them in an incarceral setting when they need to be in a therapeutic setting only damages them more, I believe,” said Tommy Johnson, Department of Corrections and Rehabilitation director.

Johnson reported having an alarming number of mentally ill people at Halawa Prison.

“We cannot now take more bodies in when the experts are already telling us that we have 40-something people that need to go somewhere,” he said.

Limited solutions explored

The Hawaii Department of Health has moved about 100 patients to other facilities, but senators say the measure is insufficient.

“I wanted the public to know how dire it was at the Hawaii State Hospital. We are trying to find solutions to decompress what is going on,” said Sen. Joy San Buenaventura.

Senators plan to push for more supportive housing in the community and new health department facilities for evaluating people, hoping to open beds for individuals who need commitment but haven’t committed crimes.

HONOLULU (AP) — A lawsuit filed Monday in U.S. court in Honolulu challenges an admissions policy of a wealthy and prestigious private school that gives preference to applicants who are Native Hawaiian.

A leading opponent of affirmation action launched a campaign last month to test the policy’s legality and stop Kamehameha Schools from favoring Hawaiians. It’s part of a movement to expand the legal definition of racial discrimination in education, which comes on the heels of a Supreme Court ruling against affirmative action in college admissions and is bolstered by the Trump administration’s war against diversity, equity and inclusion.

Now, they’re targeting scholarships, academic programs and admissions policies tied directly or indirectly to race.

The lawsuit was expected after Students for Fair Admissions — led by Edward Blum, a leading opponent of affirmative action — set up a website posing the question, “Is your child barred from Kamehameha Schools based on ancestry?”

The lawsuit doesn’t include any named or anonymous plaintiffs other than Students for Fair Admissions. The complaint says the group has members who are “injured by Kamehameha’s discrimination,” and members who are “ready and able” to apply to the Hawaii private school system, which has an endowment valued at more than $15 billion.

“We are ready for this challenge,” trustees said in a statement. “The facts and the law are on our side, and we are confident that we will prevail.”

Kamehameha Schools was founded by the will of Bernice Pauahi Bishop, the great-granddaughter of King Kamehameha I. When she died in 1884, her will directed the establishment of schools that give preference to Native Hawaiians.

Each year, the number of applications exceeds the number of spaces by as much as 17 to 1, depending on the campus and grade, according to the Kamehameha website. Alumni and parents of current students say a Kamehameha education is highly desirable because it’s affordable, offers stellar academics and is grounded in the culture of Hawaii’s Indigenous people.

“Nothing about training future leaders, or preserving Hawaii’s unique culture, requires Kamehameha to block its students from learning beside children of different ancestries — Asian, black, Hispanic, or white,” the lawsuit said.

The comment shows the group behind the lawsuit doesn’t understand what is means to be Hawaiian or multiracial, said state Sen. Jarrett Keohokalole, who is running for Congress.

He noted that his mother is a white woman from Medford, Oregon, making him Scottish, German, French, Tahitian and Hawaiian.

The challenge to Kamehameha Schools is coming from “tone deaf outsiders who know nothing about Hawaii,” said Keohokalole, who applied in 1995 for seventh grade, and two years later for high school, but was rejected and graduated from a Catholic boys school.

There’s an understanding among Hawaii residents that only students with Hawaiian blood will be admitted. Many see the policy as a way to remedy disparities stemming from U.S. colonization and the 1893 overthrow of the Hawaiian Kingdom by a group of American business owners.

The lawsuit says that if not for the admissions policy, there are non-Hawaiian families who would apply for reasons including: “bad experiences with local public schools,” Kamehameha’s “high-quality programs” and for its networking and career opportunities.

This isn’t the first time Kamehameha has had to defend its admissions policy.

In 2005, a panel of the 9th U.S. Circuit Court of Appeals struck down the policy of restricting admission to Hawaiians, ruling it violated federal civil rights law. Kamehameha sought a rehearing.

The following year, the court upheld the policy. Kamehameha later settled with the family of the student who brought the case when he was denied admission.

According to the recent lawsuit, that settlement was $7 million.