As work gets underway on a far-reaching audit of the multibillion-dollar rail project, state Auditor Les Kondo warned officials that his office has already identified potential red flags.

Legislation passed last year allowing the use of additional tax revenue to bail out the more than $9 billion project gave the state increased oversight of the city project.

The law, known as Act 1, authorized an estimated $2.4 billion funding package by extending Oahu’s 0.5 percent general excise tax surcharge an additional three years to 2030 and increasing the state’s hotel room tax by 1 percentage point for the next 13 years.

As part of the deal, the city is now required to pay rail project vendors upfront and submit requests for reimbursements from the excise tax surcharge and increased hotel tax revenues to the state comptroller. It tasks Kondo with performing an annual review of those reimbursements and completing a comprehensive audit of the Honolulu Authority for Rapid Transportation by the end of the year.

At a HART board meeting Thursday, Kondo said there appears to be disagreement over what types of expenses are reimbursable to HART under the law.

The law says the earmarked revenues can be used only for capital or construction costs. It prohibits spending on “administrative, operating, marketing or maintenance costs, including personnel costs.”

“At this point in time, I’m not really confident that we, my office, is on the same page as HART and DAGS (the state Department of Accounting and General Services) as to what costs are reimbursable,” Kondo said.

HART board member Wes Machida, the state’s former budget director, asked Kondo how significant the discrepancies are and whether discussions are ongoing to resolve them.

Kondo said HART Chief Financial Officer Robert Yu and DAGS have talked to him about some expenses and that he in turn has expressed “concern that we don’t see the same playing field.”

“I think it’s important for us to talk as soon as we can with DAGS and with HART to make sure that we see the same lines, so to speak, as to what falls within the expenses that qualify for reimbursement under Act 1,” he said.

‘More cautious’

At HART board member Ember Shinn’s request, the board voted to convene in executive session behind closed doors to discuss the issues raised by Kondo and to meet with the board’s attorney.

As former director of the Office of Information Practices, which administers the state’s Sunshine Law requiring open public meetings, Kondo suggested the board rethink that decision, but the board went into a private meeting anyway.

Kondo declined to elaborate on any specific expenses outside the meeting.

“I don’t want at the end of the year — when it’s our turn to verify the annual costs — I don’t want anyone to be surprised if we disagree. I don’t know if we disagree yet or not,” he said. “Frankly, it’s a little premature for us to jump in, but that said, we should be on the same page. … My feeling is that since the money will have already been reimbursed, I don’t know the vehicle or the mechanism if we disagree, but I’ve got to assume that there is some, for lack of a better word, consequence.”

House Finance Chairwoman Sylvia Luke, who was a lead proponent of increasing oversight of rail, welcomed Kondo’s preliminary red flags.

“This is why we got Les Kondo to be the watchdog over expenditures of HART,” Luke (D, Punchbowl-Pauoa-Nuuanu) told the Honolulu Star-Advertiser. “I’m very pleased to hear that the Auditor’s Office is taking a very proactive approach, because he’s helping us to be the watchdog over taxpayers’ dollars.”

The review of reimbursements was added as an safeguard, she said, because there was concern that DAGS might simply “rubber-stamp” HART’s expenses.

“We meant it to be one additional eye or one additional layer of looking at some of these invoices as opposed to having the costs continue to overrun as we have seen,” Luke said. “The intent was very clear: construction only, no operations.”

She added that it’s prudent to be proactive.

“Because the City and County of Honolulu has lost the public’s trust with this program, it’s probably better to be more cautious and more nit-picky about every single expenditure than less, because that is what the state expects and that is what the public expects,” Luke said.

Audit underway

Meanwhile, Kondo said work has started on the comprehensive audit, which lawmakers provided $1 million for his office to complete. Kondo, who noted that his office has subpoena powers, told rail officials he expects HART’s full and timely cooperation.

Under the law, the audit’s scope includes HART’s financial plan; fiscal and management policies associated with the plans, design, bidding and construction of rail; all contracts awarded for the project, including payments to contractors, subcontractors and consultants; change orders; and expenditures for personnel costs, lease rent and other operations and management costs.

The overall purpose of the audit, according to Act 1, is “to determine whether funds received by HART … are being managed and used in a reasonable manner.”

Although the audit is not forensic in nature, Kondo said his consultant team for the review includes Daniel Hanagami, chief special agent in charge of the investigations division of the Attorney General’s Office, and retired Circuit Judge Randal Lee. Both men have extensive experience with criminal investigations.

Hanagami, a former Honolulu Police Department major, was lead investigator of the criminal probe into personal purchases by former Hawaii island Mayor Billy Kenoi on a county- issued credit card. Before being appointed a state judge, Lee was a deputy prosecuting attorney for the city, overseeing white-collar crimes and public corruption cases.