HAWAII INSURERS COUNCIL v. Lingle
201 P.3d 564, 2008 Haw. LEXIS 287, 120 Haw. 51 (2008)
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Rule of Law:
The legislature violates the separation of powers doctrine when it transfers money collected as regulatory fees from a dedicated special fund to the state's general fund for non-regulatory purposes, thereby unlawfully converting permissible executive branch fees into general tax revenue.
Facts:
- In 1999, Hawaii's Department of Commerce and Consumer Affairs (DCCA), including its insurance division, became financially self-sufficient, funded by the entities it regulates.
- The legislature established the Insurance Regulation Fund (IRF), a special fund into which assessments and fees from insurers were deposited to cover the costs of regulation, with a provision that the funds could not revert to the state's general fund.
- The insurance commissioner collected assessments from insurers, such as members of the Hawaii Insurers Council (HIC), to cover the division's operating budget, its pro rata share of DCCA and Department of Budget and Finance (DBF) overhead, and to build a cash reserve for contingencies.
- In 2002, the legislature determined the IRF contained surplus funds and enacted legislation directing that $2,000,000 be transferred from the IRF to the state's general fund to help balance the state budget.
- In 2003, the legislature authorized an additional transfer, and the director of finance subsequently moved $1,500,000 from the insurance regulation fund (by then a sub-account of the Compliance Resolution Fund) to the general fund.
- A total of $3,500,000 was transferred from the special insurance fund to the state's general fund.
Procedural Posture:
- The Hawaii Insurers Council (HIC) filed a complaint in the first circuit court (trial court) against the State seeking to enjoin the transfer of funds and for declaratory relief.
- On cross-motions for summary judgment, the circuit court ruled in favor of HIC, finding the assessments were an unconstitutional tax.
- The State, as appellant, appealed the final judgment to the Intermediate Court of Appeals (ICA).
- The ICA affirmed the circuit court's judgment, agreeing that the assessments were unconstitutional taxes under the test established in State v. Medeiros.
- The State, as petitioner, filed an application for a writ of certiorari, which the Supreme Court of Hawaii granted.
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Issue:
Does the legislature's transfer of funds from a special insurance regulation fund to the state's general fund violate the separation of powers doctrine by impermissibly converting regulatory fees into a tax?
Opinions:
Majority - Levinson, J.
Yes, the legislature's transfer of funds violates the separation of powers doctrine. While the initial assessments were permissible regulatory fees, the legislative acts transferring $3.5 million of those fees to the general fund unlawfully converted them into general tax revenue. The court first distinguished its precedent in State v. Medeiros, holding that its three-pronged test applies only to user fees, not regulatory fees. For regulatory fees, the court adopted the test from San Juan Cellular Telephone Co. v. Public Service Commission, which asks whether: (1) a regulatory agency assesses the fee, (2) the money is placed in a special fund, and (3) the money is used to defray regulatory costs rather than for a general purpose. Applying this test, the court found the assessments for overhead and a cash reserve were legitimate regulatory purposes. However, the ultimate use of the $3.5 million for general state purposes failed the third prong. By mandating the transfer, the legislature impermissibly blurred the line between the executive's power to assess fees and the legislature's power to tax, violating the separation of powers. The court ordered the $3.5 million to be returned to the special fund.
Analysis:
This decision clarifies a critical distinction in Hawaii administrative law between 'user fees' and 'regulatory fees,' formally adopting the San Juan Cellular test for the latter. The ruling establishes a significant limitation on legislative power, prohibiting the legislature from raiding dedicated special funds financed by regulatory fees to solve general budget shortfalls. This protects the integrity of self-funded regulatory schemes by ensuring that fees paid by a specific industry are used for its regulation, thereby reinforcing the separation of powers by preventing the legislature from using executive branch agencies as an indirect tool for raising general revenue.
