HAWSCT: Separation of Powers Prohibits Legislative Transfer of Agency's Regulatory Fees to General Fund

How often in an appellate opinion does the court use the term "glom?" 

[The Appellee] gloms onto the "police power" aspect of the definition [of regulatory fees] in arguing that "Medeiros plainly concern[ed] the 'police power' of 'criminal investigative services,' not a user fee as suggested by [the state]."

No matter what you may think of the phraseology of Hawaii Insurers Council v. Lingle, No. 27840 (Haw. Dec. 18, 2008), the decision is important because who can take your money,  how they go about doing it, and what happens to your money afterwards, matters. As Chief Justice John Marshall famously wrote in McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316 (1819), "the power to tax is the power to destroy," and that may be even more true today where the power to regulate and impose fees may be the same thing.

Under Hawaii law, only the state Legislature and the various County Councils can impose taxes: the Legislature has the general taxation power, and the Councils have -- at least according to a recent decision by the Hawaii Supreme Court -- the exclusive power to determine property taxes. In Hawaii Insurers Council, the Hawaii Supreme Court held that assessments imposed by the state Insurance Commissioner were not unconstitutional "taxes" when imposed -- they were "regulatory fees" -- but the Legislature's transference of $3.5 million of the collected funds into the general fund violated separation of powers. 

The facts of the case are relatively straightforward and are set out in the opinion, so we won't repeat that effort. Read the slip opinion for the details. The short story is that the State of Hawaii no longer funds the Department of Commerce and Consumer Affairs from the general fund, but by user fees and fees imposed on regulated industries, including the insurance industry. The Insurance Regulation Fund contained the monies collected by the Insurance Commissioner. By statute, the money in the IRF could not be transferred to the state's general fund. Included in the insurance division's budget was a "reserve of surplus funds" to be used to cover expenses and contingencies that may  arise in the insurance industry (the rehabilitations, insolvencies, etc., we have all become very aware of recently on a national level). In 2004, the Legislature decided to change the statute and transfer $4 million of this money into the general fund, but that amount was cut by the Governor's line-item veto to $2 million. The following year, the Legislature transferred an additional $1.5 million to the general fund.

A lawsuit by the Hawaii Insurers Council followed, and eventually the Intermediate Court of Appeals held, among other things, that the assessments were "taxes" because they were not allocated to defraying the costs of providing services to the insurance industry and were not proportionate to the benefits received. See Hawaii Insurers Council v. Lingle, 117 Haw. 454, 459-60, 184 P.3d 769, 775 (Haw. Ct. App. 2008). The Hawaii Supreme Court partly agreed, and partly did not. The court first discussed its earlier opinion in State v. Medeiros, 89 Haw. 361, 973 P.3d 736 (1999), which identified two permissible types of fees: user fees (those charged for the use of an item of facility), and regulatory fees which include those imposed by an agency to cover the expenses of regulating an industry. At the end of the day, the Hawaii Supreme Court disagreed with the ICA and held that the fees imposed by the DCCA were not illegal "taxes" or "user fees," but were constitutional "regulatory fees" Ben Lowenthal does a good job of summarizing the court's reasoning here.

The most interesting part of the opinion, however, is not the minutiae of the different legal tests for taxes or user fees or regulatory fees, but the court's conclusion that the transfer of the funds by the Legislature to the General Fund violated the separation of powers doctrine. The court recognized that "separation of powers" is not formally a part of the Hawaii Constitution, but is an implied requirement, and concluded:

The legislature's promulgation of the transfer bills amounted to an impermissible blurring of the distinction between the executive power to assess regulatory fees and the legislative power to tax for general purposes. We therefore hold that the transfer bills unlawfully sought to transform $3,500,000 of legitimate regulatory fees into general tax revenue....As such, the $3,500,000 that was moved into the general fund pursuant to the transfer bills must be returned to the CRF so that they may be used for the regulation or benefit of the parties upon whom the assessments were imposed.

Slip op. at 41-42 (footnote omitted). While the opinion does not expressly say so, what seems to animating the court's decision is that the Legislature's raid of the funds crossed some indistinct and not-quite-defined line because when the IRF funds were placed into the General Fund, they could be spent in the same way as collected taxes. The court established a bright-line rule: agencies collect fees and legislatures tax, and never the twain shall meet. In other words, if the government collects a fee in order to regulate an industry, it better use the money collected to regulate the industry.

Finally, the court easily disposed of the equal protection class-of-one disparate treatment claim, holding there was a rational basis for requiring a regulated industry to pay for the costs of regulation. The court also rejected the State's claim that HIC did not exhaust administrative remedies, holding that the administrative process cannot make constitutional determinations, and consequently, there were no administrative remedies to exahust.