The Ceded Lands Case -- Money Intended for Education Goes to OHA

by H. William Burgess and Sandra Puanani Burgess

Hawaii Bar Journal, July 2001, pp. 9-15.
(c) 2001 Hawai'i State Bar Association

(footnotes are indicated by / Thus /4 indicates footnote #4)

From its inception in 1898, the primary goal of Hawaii’s public land trust was public education. The Annexation Act of 1898 required that the United States hold all revenues or proceeds of the ceded lands, with certain exceptions, “solely for the benefit of the inhabitants of the Hawaiian Islands for educational and other public purposes.”

However, twenty-three years ago, through the Constitutional Convention of 1978 and subsequent legislation, the State of Hawaii shifted this priority. It ordered the diversion of a “pro rata share” of ceded lands revenues and proceeds to “the betterment of native Hawaiians” through a newly created state agency, the Office of Hawaiian Affairs (“OHA”). One consequence was to take all of the net income from the ceded lands and divert it from public education to OHA. Another consequence was to convert what had been a race-neutral public trust to one that treated beneficiaries differently based on their ancestry.

The resulting tensions in public priorities provoked a number of lawsuits in state and federal courts. The most significant of these, at least in terms of public dollar amounts at stake, is OHA v. State, /1 now pending in the Hawaii Supreme Court. This case graphically illustrates OHA’s profound economic and other consequences for the State of Hawaii, its public schools, and its citizens.


The “ceded lands” are the 1.8 million acres of public lands owned by the government of Hawaii that, upon annexation in 1898, were “ceded” to the United States with the requirement that all revenues or proceeds of the lands, except for those used for civil, military or naval purposes of the United States or assigned for the use of local government, “shall be used solely for the benefit of the inhabitants of the Hawaiian Islands for educational and other public purposes.” /2

In 1898, about thirty percent of the inhabitants of Hawaii were of Hawaiian ancestry, and the remaining seventy percent were of other ancestry. /3

Nothing in the Annexation Act gave native Hawaiians or any other racial group any special interest in the ceded lands or any special right to the income or proceeds, beyond that which was given to all other inhabitants of Hawaii as beneficiaries of the public land trust.

Nor did native Hawaiians, merely by virtue of their ancestry, have any special entitlement to the income or proceeds of the public lands of the Kingdom of Hawaii. Everyone born in the Kingdom (except children of foreign diplomats) was a native-born subject of the Kingdom. The government of the Kingdom of Hawaii actively encouraged immigration and offered immigrants easy naturalization and full political rights. For example, the Civil Code of 1858 /4 provided that “[e]very foreigner so naturalized shall be deemed to all intents and purposes a native of the Hawaiian Islands ... and ... shall be entitled to all the rights, privileges and immunities of an Hawaiian subject.” /5


In 1959, when Hawaii became a State, the United States transferred title to these lands, less those parts retained by the United States for national parks, military bases and other public purposes, to Hawaii, with the requirement in the Admission Act that the State hold them “as a public trust” for “one or more” of five purposes: “for the support of public schools and other public educational institutions”; “for the betterment of the conditions of native Hawaiians as defined in the Hawaiian Homes Commission Act,” i.e., fifty percent or more blood quantum; “for the development of farm and home ownership”; “for the making of public improvements”; and “for the provision of lands for public use.”

Some claim that the Admission Act created a “special trust relationship,” gave “native Hawaiians” (i.e., those of fifty percent or more blood quantum) some special rights to the ceded lands, or “guaranteed” that they receive some share of the income or proceeds separate from or greater than the share of other citizens of Hawaii.

However, the Admission Act does not require that any part of the ceded lands, or income or proceeds be used in any one year, or ever, for native Hawaiians or for any particular one of the other permitted purposes.

Indeed, if the United States Congress, when it enacted the Admissions Act, had tried to give preference to one group of beneficiaries of the public land trust, the attempt would have been invalid. The United States had the right to use or occupy parts of the lands for civil, military or naval purposes and to assign parts of the lands for the use of local government. It held the rest as trustee “solely for the benefit of the inhabitants of the Hawaiian islands for educational and other public purposes.” /6 Nothing “compelled” the federal government, in transferring those lands back to Hawaii in 1959, to require the State to give preference to native Hawaiians. The opposite is true. The United States’ fiduciary duty compelled it to administer the trust impartially. /7 Permanently favoring one small racial group among the beneficiaries is not impartiality.

Furthermore, if Section 5(f) of the Admission Act were construed to require Hawaii to change its public trust to a racial one, such a construction would violate the equal footing doctrine and would be invalid.

All States, old and new, stand on an equal footing; that is, they have equality of constitutional right and power, each competent to exercise the sovereignty not delegated to the United States by the Constitution itself. /8

A State’s equality of constitutional right and power may not be hampered by any Congressional enactment even if accepted upon admission. /9 In Coyle v. Smith, /10 the Supreme Court invalidated a restriction on the change of location of the State capital, a condition that Congress had imposed as a condition for the admission of Oklahoma.

< quote > As to matters strictly of State cognizance the legislative power of the State is complete, unhampered by any congressional enactments even if accepted upon the admission of the State, for each State is admitted on an “equal footing” with the others. < endquote > /11

The first sentence of the Hawaii Admission Act includes the statement that “the State of Hawaii is declared admitted into the Union on an equal footing with the other States in all respects whatever.” However, construing section 5(f) to require Hawaii to favor a particular group to the detriment of the other beneficiaries would restrict the State’s power to determine for itself, like other States can, the best use of its own public lands and the best allocation of the income and proceeds from its public lands. The Constitution does not delegate that power to the federal government. These are matters strictly of State cognizance so that Hawaii is “unhampered by any congressional enactments even if accepted upon the admission of the State.” /12


From 1959 to 1978, the State of Hawaii channeled most of the ceded lands income to the Department of Education. /13

That use of the income from the ceded lands complied with the Hawaii Admission Act, because the support of the public schools is one of the five permitted purposes. It also complied with the United States Constitution and the Hawaii Bill of Rights, because it benefited all of the children of Hawaii who attended public schools without regard to their race or ancestry.


In 1978, Hawaii’s Constitution was amended to create OHA. Payments of the income from the ceded lands to the Department of Education ceased.


In 1980, the Hawaii Legislature, by Act 273, provided that twenty percent of all funds derived from the public land trust would be expended by OHA.

The rationale for twenty percent was apparently that the 1959 Admission Act had specified five permissible purposes, one of which was for the betterment of the condition of native Hawaiians. Therefore, OHA should receive one fifth or twenty percent of the income.

Apparently, the Legislature did not consider it important that OHA is required to use this ceded lands income solely for “native Hawaiians” (fifty percent or more Hawaiian blood count) who make up only about five percent of Hawaii’s population.

Thus, in 1980, the Legislature changed the terms of the public land trust so as to permanently give twenty percent of the funds derived from the public lands trust to a group selected only on the basis of their race or ancestry and who make up only about five percent of the public.

By this act, the State, as trustee of the public lands trust, committed itself to violate its fiduciary duty to ninety-five percent of the public, that is the about 1.1 million citizens of Hawaii who have less than fifty percent or no Hawaiian blood.


In 1990, Act 304 defined “revenue” from which OHA is to share as “all proceeds, fees, charges, rents or other income . . . derived from any . . . use or activity, that is situated upon and results from the actual use of lands comprising the public land trust.” This act that apparently has been interpreted to calculate OHA’s “pro rata share” on the gross revenues rather than on the net after expenses further compounded the breach of the State’s fiduciary duty to ninety-five percent of Hawaii’s citizens. /14

Act 304 also mandated that OHA and the State Department of Budget and Finance negotiate the amounts payable to OHA for the years 1980 through 1991.


In 1993, after extensive discussions, the Legislature considered a proposal for payment of about $130 million, including interest, for the years 1980 through 1991, supported by both OHA and the State. State officials, including the Director of the Department of Budget and Finance, testified that such amount would “settle” or constitute “paying the full amount” of OHA’s claims to revenues from the ceded lands for 1980-1991. /15

OHA did nothing to dispel this understanding but rather confirmed it. The Legislature, by Act 35, then authorized and appropriated the amount in general obligation bond funds to be paid to OHA for this purpose. /16

In April 1993, after Act 35 was enacted, OHA and an official from the Office of State Planning (“OSP”) signed a Memorandum, stating in part that “OSP and OHA recognize and agree that the amount specified in Section 1 hereof does not include several matters regarding revenues which OHA has asserted is due to OHA and which OSP has not accepted and agreed to.” /17

The official from the OSP who signed the memorandum had no apparent authority to change the terms of the settlement, which had been agreed to by the Department of Budget and Finance and OHA and submitted to and acted upon by the Legislature.

In June 1993, the $130 million was paid to OHA for its share of the ceded lands revenues for 1980 through 1991.

1994 OHA SUIT.

In January 1994, OHA commenced suit, /18 seeking payment of additional amounts going back to 1980, arising from receipts of the Waikiki DutyFree shop, public housing, the Hilo Hospital, and investment earnings on unpaid “revenue.”

In October 1996, Circuit Court Judge Daniel G. Heely granted OHA’s motion for partial summary judgment, ruling that OHA is entitled to a twenty percent share of each of the items in question.

The State appealed to the Hawaii Supreme Court. /19 The case was briefed. At the oral argument heard on April 20, 1998, the court urged the parties to settle. On July 28, 1998, the court stayed proceedings until December 1, 1998, while the State and OHA discussed settlement. On April 16, 1999, OHA made a final offer to accept $304.6 million in settlement of claims for past revenues. The State offered $251.3 million to settle all claims once and for all, a global settlement. On April 27, 2000, the OHA board voted to end settlement talks with the State. /20

Media accounts have estimated that, if Judge Heely’s decision is affirmed, between $300 million and $1.2 billion may be payable to OHA for the period 1980 through 1991, apparently in addition to the $130 million already paid to settle OHA’s claims for that period.

These figures boggle the mind. If OHA’s “pro rata share” is twenty percent, then, obviously, the “pro rata share” of the DOE, UH or other public agencies must be four times that amount (or eighty percent of the total moneys generated from the ceded lands). So, if $250 million received by the State from the ceded lands for those prior years is available to be awarded to OHA, then $1 billion must be available to go to the DOE or the UH or other public agencies for those same years. If the State’s ceded lands account holds $1 billion for OHA’s share for those years, then it must hold $4 billion for its other public agencies for those years


Calculating OHA’s twenty percent share on the gross revenues rather than the net after expenses apparently arrives at these staggering amounts.

Revenues from the ceded lands do not just drop like rain from the heavens, nor do they spring up naturally from the ground. The State has to spend money to generate those revenues.

For example, at Hilo Hospital, in order to earn revenues from services to patients, the State has to pay salaries to doctors and nurses and staff, buy and maintain and repair and replace x-ray machines, computers and other equipment, pay for electricity, gas, telephone and water, and other operating, overhead and administrative expenses. The State undoubtedly borrowed money, through issuance of bonds, to build and make improvements to Hilo Hospital and has to pay that money back with interest.

It is important to know the actual revenues that the State, as trustee of the public land trust, receives from the ceded lands, as well as the expenses the State incurs in connection with those lands and in generating those revenues before making or agreeing to any “pro rata” distribution to any beneficiaries. Under general trust law, beneficiaries are only entitled to receive shares of net income, not gross.

We have asked for this information. /21 But the State has declined to furnish it, saying the negotiations with OHA are confidential. /22


If the State is, in fact, paying OHA twenty percent of the gross revenues, OHA is probably, actually, receiving more than one hundred percent of the net income from the ceded lands. Most businesses never achieve a twenty percent profit. Government agencies operating parks, roads, public schools and universities, airports, harbors, public rental, housing and housing development programs and hospitals could probably never generate net income (i.e., gross revenues less expenses) of anywhere near twenty percent.

To illustrate the consequences of using gross revenues for the calculation, suppose a woman of Hawaiian ancestry by her will leaves a ten-acre parcel of vacant land in trust for her two young children, a boy and a girl, each being an equal beneficiary. The vacant land generates no revenues, so the trustee decides to subdivide the property into five lots and lease the lots. To do so, he must build a road. The trustee borrows $12,000 to build a road and pay the expenses of subdivision. He then leases the five lots for total rent of $10,000 per year. The trustee has to pay back the loan principal at the rate of $3,000 per year and incurs expenses of maintaining and repairing the road, landscaping, interest, insurance, accounting, attorneys fees, and trustee fees of another $3,000 per year. The gross revenues of the trust are therefore $10,000. The income, after expenses and debt service, is $4,000 per year.

Suppose one of the beneficiaries, the young boy, hires a lawyer to demand that the trust pay the boy $5,000 per year as his fifty percent of the pro rata share of the trust revenues. Such a demand would clearly not be right.

To pay $5,000 per year to the boy, the trustee would have to pay him the entire $4,000 net income (leaving no share for the girl) and then either borrow $1,000 or give the boy $1,000 worth of the land. If that continued for enough years, the trust would become insolvent, or the boy would finally have all the land. The girl, an equal beneficiary, would receive no benefit at all from the trust; and, if she were in the same shoes as over a million of Hawaii’s citizens, she would even have to pay taxes to the trustee annually, so the Trustee could repay the money he had borrowed to pay the boy.

Funny as it sounds, that seems to be pretty much what is now happening here in the State of Hawaii. The State is apparently paying OHA for its “pro rata share,” twenty percent of the gross revenues from the ceded lands. Since that figure probably exceeds the entire net income, nothing is left for public education or any other public purpose. The State borrowed over $130 million in 1993 to pay OHA; and, at least based on media reports, the State negotiators were and still might be considering giving OHA ceded lands worth hundreds of million dollars to settle the pending lawsuit.

The over-one-million citizens of Hawaii who do not happen to have fifty percent or more blood quantum are receiving no income whatsoever from the public lands trust, despite the fact that each of them has (or had up until 1980 when the Legislature set OHA’s pro rata share as twenty percent) as much right to benefit from the ceded lands as any native Hawaiian. To make matters worse, those over-one-million citizens will have to pay taxes for years into the future so that the State can repay the moneys it has borrowed to pay OHA. If the State transfers land to OHA or borrows more millions to pay OHA, and if that practice continues for long enough, the State of Hawaii will eventually become insolvent, or OHA will end up with all the ceded lands.

The economic and social consequences are already being felt. The editorial page of the Sunday January 3, 1999 Honolulu Advertiser discussed the latest numbers from the United States Census Bureau that show that Hawaii from 1997 to 1998 lost the highest percentage of its residents to other states among all the fifty states. The editorial said it is clear where the movement is coming from: recent graduates in search of good jobs and mid-career working families who have become exhausted by the struggle to keep up in Hawaii. It then went on to say what, to us, is the most disturbing part:

< quote > There are real reasons for the exodus: the relative lack of opportunity here compared with robust job and home ownership opportunities in other states. But there are also psychological reasons: a fear that Hawaii is sliding from bad to worse; a concern that the Island qualities that make the struggle worthwhile are being lost. < endquote >

The illogic of giving all the net income to OHA is compounded by the fact that OHA is required to use these funds, not for all Hawaiians, but solely for “for the betterment of Native Hawaiians,” as defined in the HHCA (fifty percent or more Hawaiian blood). As discussed earlier, they are only about 5% of our population.

Now there’s the Rice case. /23 That decision struck down a racial restriction on voting in Hawaii’s statewide elections for OHA trustees. In Rice, the Court held that the definition of “Hawaiian” established a racial classification, and that the state law, by depriving Hawaii’s other citizens of the right to vote because of their race, violated the Fifteenth Amendment to the United States Constitution. Recently, the Federal district court in Hawaii, relying on the Rice decision, held that a state law that permitted only “Hawaiians” to seek or hold office as OHA trustees also violated the U.S. Constitution. /24 Other suits based on Rice have since been filed to overturn other state law entitlement programs for persons of Hawaiian ancestry.

Given all these concerns, should public school children have been deprived of a source of funds so that a bureaucracy for less than 5% of the population can receive constitutionally questionable extra benefits? Statewide enrollment for the public schools in a recent year was 187,395. /25 In addition, the University of Hawaii system served 71,000 to 72,000 students in credit and non-credit programs during Fall 1998.

All parents of children in the public schools (including those of Hawaiian ancestry) and all those who think public education is important to Hawaii’s economy should stand up and demand that this giveaway to OHA be stopped.

Such payments to OHA, whether in cash or in land, may be disastrous to the state, not only financially, but morally and socially.

What is at issue is public land and public money, your land and your money, the land and money needed to educate children, to run the state, to care for those in need, based on need rather than ancestry, and to provide the opportunity to achieve prosperity and better lives for all of Hawaii’s citizens, Hawaiian and non-Hawaiian alike.

_____________________ FOOTNOTES

1 S.Ct. No. 20281.

2 Annexation Act (sometimes referred to as the Newlands Resolution), 30 Stat. 750 (1898). Such a special trust was recognized: in 1899, by the Attorney General of the United States in 22 Op. Atty. Gen. 574 (1899); by the Hawaii Supreme Court: “Excepting lands set aside for federal purposes, the equitable ownership of the subject parcel and other public land in Hawaii has always been in its people. Upon admission, trusteeship to such lands was transferred to the State, and the subject land has remained in the public trust since that time.” State v. Zimring, 58 Hawaii 106, 124, 125 (1977); and by the State Attorney General, Opinion July 7, 1995 to Governor Benjamin J. Cayetano from Margery S. Bronster, Attorney General: “Section 5 [Admission Act] essentially continues the trust which was first established by the Newlands Resolution in 1898, and continued by the Organic Act in 1900.”

3 See Robert C. Schmitt, Demographic Statistics of Hawaii: 1778-1965. (Honolulu, 1968).

4 Civil Code of 1858, §432.

5 See also Hanifin, To Dwell on Earth in Unity; Rice, Arakaki, and the growth of citizenship and voting rights in Hawaii, en.

6 Att’y. Gen. Op. July 17, 1995, fn. 1, supra.

7 Restatement of Trusts, (Second) §183; Pele Defense Fund v. Paty, 837 P.2d 1247, 1263 fn 18(1992).

8 Escanaba Co. v. Chicago, 107 U.S. 678, 689 (1883); Utah Div. of State Lands v. United States, 482 U.S. 193 (1987), accord Amici Curiae Brief by attorneys general including Corinne K.A. Watanabe, then Attorney General of Hawaii.

9 Pollard’s Lessee v. Hagen, 44 U.S. (3 How.) 212(1845).

10 221 U.S. 559 (1911)

11 In re Island Airlines, 44 Haw. 634, 642, 361 P.2d 390 (1961).

12 In re: Island Airlines, supra.

13 Final Report of the Public Land Trust, Legislative Auditor Dec. 1986; see also 808 Haw. Att’y Gen, Op., 1980 WL 26216 (July 8, 1980).

14 OHA recognizes the windfall it receives from Act 304. OHA’s financial statements for years ending June 30, 1996 and 1997 show on page 35 that, on November 4,1996, $ 1 million was allocated to an advertising campaign to “Protect 304.”

15 See Appellant’s (the State’s) Amended Opening Brief filed May 6, 1997 in OHA v. State, S. Ct. No. 20281, pages 30 -33.

16 Id.

17 Id.

18 OHA v. State, Civil No. 94-0205-01, First Circuit Court.

19 S.Ct. No. 20281.

20 Honolulu Star-Bulletin articles, April 20, 27 & 28, 1999.

21 Ex. 3 to Motion to Intervene 4/29/99 in OHA v. State, supra.

22 Id., Ex. 4.

23 Rice v. Cayetano, 528 U.S. 495 (2000).

24 Arakaki v. State, Haw. No. CV-00-00514 HG-BMK (September 19, 2000), appeal pending 9th Cir. No. 00- 17213.

25 Hawaii DOE, Statistical Research & Analysis Section. H. William Burgess practiced law in Hawaii for 35 years until he retired in 1994. His wife, Sandra Puanani Burgess, who is of part Hawaiian ancestry, was one of the plaintiffs in Arakaki v. State which invalidated the racial restriction on eligibility for the OHA.

H. William Burgess practiced law in Hawaii for 35 years until he retired in 1994. His wife, Sandra Puanani Burgess, who is of part Hawaiian ancestry, was one of the plaintiffs in Arakaki v. State which invalidated the racial restriction on eligibility for the OHA board.