Hawaii Supreme Court Holds that the Legislature Cannot Transfer Regulatory Fees from a Special Fund to General Fund

Considering the various fees collected during the land use process, it is good to know that those fees will be used for its intended purpose as the Hawaii Supreme Court recently instructed in Hawaii Insurers Council v. Linda Lingle, Haw. S. Ct. No. 27840, Dec. 18, 2008.

In Hawaii Insurers Council, the supreme court held, inter alia, “that the insurance commissioner's assessments were not unconstitutional when they were initially imposed . . . but that the legislature's transfer of $3,500,000.00 of those funds into the general fund was unconstitutional under the separation of powers doctrine[.]”

The court opined that the fee collected was in fact a fee and not a tax (only the legislature may impose taxes, not the executive branch). The court applied a three part test set forth in San Juan Cellular Telephone Co. v. Public Service Commission of Puerto Rico, 967 F.2d 683 (1st Cir. 1992) to determine that the collection of the regulatory fee was proper, as follows: (1) the charges at issue were assessed by the commissioner of the insurance division of the Department of Commerce and Consumer Affairs (“DCCA”) a regulatory agency; (2) the assessments were placed into a "special fund" to be utilized to reimburse the insurance division for the cost of regulating the insurance industry; and (3) expenditures from the special fund were intended for the regulation or benefit of the parties upon whom the assessment was imposed and not for general public purposes. Therefore, the special fund was properly collected and expended by the DCCA.

The above determination was in contrast to the intermediate court of appeal’s (“ICA”) determination that the fee was an impermissible tax. However, the supreme court further held that when the legislature attempted to transfer these funds into the general fund, it was unconstitutional under the separation of powers doctrine, because it “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.”

Therefore, although the supreme court’s decision was different from the ICA’s, the outcome was the same, the legislature must return funds collected by the insurance commissioner for regulatory purposes to the commission and it may not be reallocated by the legislature for general purposes.