The Lower Hamakua Ditch has outlived sugar, but many of the parties who have designs on the former cane land don’t want to see the ditch die. Despite the interests of several large landowners (including, first and foremost, Kamehameha Schools/Bishop Estate), the burden of maintaining the ditch after the final harvest has fallen exclusively to the state of Hawai`i. And the money used in support of ditch maintenance for the first nine months was drawn from funds set aside by the 1994 Legislature to assist in the development of several specific projects intended to help diversified agriculture get on its feet in the Hamakua region.
This was not as the state originally intended. In the complicated negotiations that occurred between the two primary creditors of the bankrupt Hamakua Sugar Company — the state and the Western Farm Credit Bank — a cost-sharing approach to ditch maintenance was anticipated.
According to provision 25 in the “Settlement Agreement” filed with the U.S. Bankruptcy Court on June 11, 1993, the bank agreed to “cooperate in good faith with the state and other owners whose lands abut or use the Lower Hamakua Ditch (the “Ditch”) to enter into a Master Water Agreement or Water District Agreement regarding the Ditch. Prior to entering into any such agreement, WFCB may, but is not obligated to, provide for the normal repair and maintenance of the Ditch. In the event WFCB fails to so maintain the Ditch, the state may, but shall not be obligated to, maintain the ditch and charge WFCB its pro rata portion of any cost incurred based upon the historical sue of the Ditch. Said cost shall not exceed WFCB’s pro rata portion of $360,000 per year in any one of the next three years.” Because the trustee in bankruptcy was supervising the final harvest into October 1994, the agreement was not to be in force until that time.
But in the days before the final harvest ended, Bishop Estate bought almost all the sugar company’s 31,000 acres for $21 million in a foreclosure action held to quiet the bank’s $125 million in claims against the plantation. When the U.S. District Court confirmed the sale on October 3, however, the provision requiring the land owner to share in maintenance of the ditch had dropped out of sight.
‘A Profit Center’
When this omission was noticed by certain state officials, panic set in. One of those officials was Jack Keppeler, then a deputy director of the Department of Land and Natural Resources. In a letter dated October 10, 1994 — the day the final harvest ended and the trustee in bankruptcy was absolved of any responsibility for maintaining the ditch — Keppeler wrote Anthony P. Serreno, head of the Asset Management Group of Bishop Estate. Noting at the outset the subject of his letter was the Lower Hamakua Ditch, Keppeler told Serreno this was “a matter of urgency and importance… Not directly or specifically mentioned in the District Court’s order confirming the foreclosure sale to Bishop Estate is Paragraph 25…
“We do not know whether the omission was purposeful or unintentional, but it appears to us (from the conversations reported to us) that Bishop Estate has not focused on … the importance of maintaining and preserving the Lower Hamakua Ditch for all of the landowners in the area.”
Two days later, Robert Lindsey, manager of Bishop Estate property on the Big Island, responded to Keppeler: “I operate a profit center… [M]y operational goal is to increase income and value. Hence, we will not rush into making decisions on matters now which we may regret later… The Hamakua Ditch is a major issue and therefore the time we must give to the ditch and how it fits or does not fit into our land use planning will be extensive and exhaustive.”
According to Lindsey, the bank’s commitment to contribute up to $1,000 a day on ditch maintenance “was not transferable” to Bishop Estate. “Until my staff and I have a clear sense of what uses will occur on our Hamakua lands, and whether Hamakua ditch water is necessary to implement these uses,” Lindsey told Keppeler, “I am not ready to recommend to our board that we should at this time commit any resources to ditch management.”
Unilateral Maintenance
With the bank out of the picture and Bishop Estate apparently unwilling to pitch in, officials in the state Department of Agriculture decided the state alone would shoulder the full burden of ditch maintenance. In early October 1994, Paul Matsuo, administrator of the department’s Agriculture Resource Management branch, approached David Young of Wai Engineering to see if his firm, which already had a state contract (for $195,000) to assess the condition of the ditch, would help out by providing maintenance serves on an emergency basis.
Young agreed, and on October 11, a crew from Wai Engineering began patrolling the ditch. Matsuo asked Young to quote him a price for the job and promised that the paperwork — and the payment — would come later. On October 10, Matsuo received the approval of the state procurement office of the award of an interim contract to Wai Engineering. But on the same day that work began, Hawai`i County Council Member Takashi Domingo, a former employee of Hamakua Sugar himself, wrote Matsuo, voicing his objections to the hiring of an outside firm for this job. (Wai Engineering is based on O`ahu.)
“A reliable source,” Domingo wrote, “informed me that a contract [for ditch maintenance] will be awarded within a short time… I’ve heard of the potential firm that would be considered to maintain the ditch… The concern among some people is the propriety of this anticipated action… I would like to point out at this time that there are other displaced workers who are willing and capable to assume this task.”
On the 18th of October, Matsuo met with Domingo and several other former sugar workers. By now, Wai Engineering, which was continuing to perform routine ditch maintenance, began to realize its presence was not welcomed by Domingo and his friends. On October 21, Young, Wai’s general manager, notified Matsuo that, “after further consideration, Wai Engineering, Inc., has elected to not quote on the ‘interim operation and maintenance, Lower Hamakua Ditch’ job.”
The Home Team
By using the Hamakua workers, Domingo suggested, Matsuo could draw on funds provided by Act 241 of the 1994 Legislature. That act set aside $850,000 to help pay for capital improvements in the Honoka`a area that might be needed to give a boost to fledgling ventures in diversified agriculture.
The legislation identified four purposes for which the funds were to be used: providing access to water from the ditch system; upgrading a road and building a bridge; researching other agricultural infrastructure needs in the area; and building a warehouse for packing, processing, and storage. Maintenance of the ditch was not among the listed purposes.
Nonetheless, Domingo held out to Matsuo the prospect that the Act 241 funds could be spent for ditch maintenance, so long as a local crew did the work. In a letter to Matsuo dated November 2, and whose purpose was to press Matsuo once more into hiring “the Hamakua Ditch Maintenance Team,” Domingo suggested money for the work could come more readily from funds set aside for the “Hilo-Hamakua Agricultural Cooperative” (a group of farmers who were to be the principal beneficiaries of Act 241) “rather than having to tap into another funding source for Wai Engineering’s compensation.”
In fact, Matsuo needed no such encouragement; he had already targeted Act 241 as the source of funds for the work. In a memo outlining points agreed upon in a meeting of state officials held October 13, then-DOA Chairman Yukio Kitagawa specified that $180,000 of the Act 241 money would be used for “interim operation and maintenance of the Lower Hamakua Ditch.” (At that time, however, Kitagawa still anticipated recouping up to half of that amount from the Western Farm Credit Bank, so the state’s “actual cash outlay would be only $90,000” for six months.)
Still, had the Hamakua-North Hilo Agricultural Cooperative, with which Domingo was closely allied, objected to the use of Act 241 funds for ditch maintenance — a threat implied by Domingo should the local “team” not be employed — the Department of Agriculture might have had greater difficulty finding a source of funds to pay for the work.
Non-Performance
In late October, “the Team” submitted a formal proposal to Matsuo. The state had anticipated spending $30,000 a month on ditch maintenance; perhaps not coincidentally, “the Team” proposed six months of maintenance work (the maximum term allowed under an emergency, no-bid contract) for $180,000 exactly. (A fee of $9,000 — or 5 percent — was to go to the consultants who developed the proposal: Eric Renz and Damien Schwartz, who were to be paid an additional $3,500 a month — or $21,000 over the life of the contract.)
From the description of “Team” personnel provided in the proposal, it would be hard to characterize them as unemployed sugar workers in need of jobs. Team leader Gary DeRego (former bargaining unit supervisor at Hamakua Sugar for the International Longshoremen and Warehousemen’s Union) has a contractor’s license and his own contracting company “with five full-time employees,” the proposal states. Second in command is Ernest Alfonso, Jr., a former sugar company employee who “is also the proprietor and operator of Al’s Tractor Service, Inc., a full-service machine shop in Honoka`a,” whose revenues “have exceeded $150,000 for one year,” the proposal reports. Helping out with administration is Jolly Embernate, who, since 1992, has managed the Pa`auhau Federal Credit Union, according to the proposal.
DeRego and Alfsonso proposed paying themselves $3,000 a month each, exclusive of benefits, for their participation in ditch maintenance. The four men responsible for day-to-day work on the ditch — Milton Laukong, John Laukong, Manual Soares, and Lawrence Martinez — were each to receive weekly pay of $451. Embernate’s salary was set at $2,000 a month.
Questions
The “team” that eventually got the contract for the maintenance work was DeRego Services. As occurs frequently in state government, long months passed between the award of the contract and its signing (and the first payment). While the state had provided DeRego with a letter to its bank assuring the bank that DeRego would be paid (thus allowing DeRego to establish a line of credit, covering operating expenses for the first few months), DeRego Services apparently failed to perform up to the standards promised in the “Team” proposal.
In documents made available to Environment Hawai`i, the first sign of a problem arises in a memo dated February 16, 1995, from the then-director of finance, Earl Anzai, to Agriculture Chairman James Nakatani. “We are in the process of executing an Agreement with DeRego Services and your Department,” Anzai wrote. “We have received information that the contractor, DeRego Services, may not be providing all of the required services as described in the agreement… Therefore, it is recommended that the DOA look into this matter.”
This prompted a meeting on March 1 between Matsuo and the DeRego “team.” After many complaints about the lack of a signed contract, Matsuo asked whether the required monthly reports had been prepared. None had been, he was informed. Furthermore, Matsuo was told, if the work had been done so far without the reports, maybe there was no need for them. (Several weeks later, a sheaf of one-page monthly reports was sent to the DOA office, all appearing to have been written at the same time, by the same person, in the same style, and reporting, generally, the same events.)
Matsuo asked whether maintenance had been done properly. The minutes of the meeting indicate the following response: “Answer: No! Contract wasn’t signed.”
Despite the failure to perform, one of the more pressing items up for discussion at the meeting was what would occur on April 9, 1995, when the six-month contract expired.
Long Hours
DeRego’s departure from the original scope of work in the proposal made it difficult for the state to sign a retroactive contract for the identified services. On March 1, 1995, DeRego’s Services submitted a new breakdown of the costs associated with ditch maintenance between October 18 and February 28.1 For those 19 weeks (95 working days), Gary DeRego claimed to have worked 800 hours on the ditch. That works out to more than 8 hours for each weekday, leaving DeRego little time to run his contracting business. Billing the state $18.75 for each hour, DeRego sought payment of $15,000 for his own work. Identical hours, at an identical rate of pay, were submitted by Ernest Alfonso.
Bookkeeper Jolly Embernate spent even more hours (834) on the job. But at an hourly rate of $12, her total pay came to $10,000. The unnamed workers (one identified as working for DeRego’s Services, the other for Al’s Tractor) each received $20 an hour. They worked a mere 192 hours (the report said), for a total of $3,840 apiece.
According to this same breakdown of costs, three pickup trucks logged a total of 1,792 hours in maintaining the ditch; for this the state was charged $7 an hour. Fuel for the trucks was pegged at $2.25 a gallon for state reimbursement.
Costs for labor, supplies, administration, and equipment came to $101,714, and to this an additional 15 percent for profit was added, bringing the total to $116,971.10.
For whatever reason, this invoice was not paid. Instead, on March 7, DeRego submitted an invoice seeking even more payment for a fore-shortened term. That invoice had no breakdown of costs. Rather, a monthly fee of $30,000 was charged for the four months from October 21 to February 21. This was paid.
Renewal
In April 1995, Matsuo again requested approval by the chief procurement officer of an emergency contract for ditch maintenance. The period covered was from April 7 to June 30, by which time the Department of Agriculture expected to have in place a long-term contract for the work. The vendor for the emergency contract was again DeRego Services.
Initially, the amount approved for the contract extension was $110,000, or more than $40,000 a month. However, Matsuo was instructed by the Department of Budget and Finance to renegotiate the fee. By May 4, Matsuo informed Budget and Finance that the cost for the extension would be $41,233.76, or $15,000 a month. (Again, it may not be coincidental that the original DeRego estimate of $110,000 matched exactly with the amount of Act 241 funds for which no clear purpose had been identified.)2
On April 27, the state procurement office issued an invitation for sealed bids for the long-term (26 months, 10 days) maintenance of the ditch. According to Corinne Higa of that office, just one bid was received — from DeRego Services. The amount bid was $14,995 per month, for a total payment of just under $400,000.
Critical Reviews
While DeRego is getting paid, there are many people in Honoka`a who have been openly critical of the work being done. At practically every public meeting regarding the ditch held from May to July, many people expressed resentment over the fact that the men who worked on the ditch for years for Hamakua Sugar were not kept on the job, either by the state or by the contractor.
Among the complaints: the intakes have become plugged up with sand; grass is growing in the ditch; culverts are leaking; no one is ever seen working on the ditch.
At the time of the July 18 meeting, no water was being delivered at the Pa`auilo end of the ditch. According to Matsuo, the problem had been identified and DeRego Services was going to fix it the next day.
Who Pays?
No large users of ditch water exist today; most of the water diverted from the back of Waipi`o Valley spills into gulches alongside the several reservoirs fed by the ditch. What users there are — at Haina, Pa`auilo and elsewhere — get the water for free. Until the 1995 legislative session, the Department of Agriculture maintained it had no legal authority to collect fees from users of the ditch, despite its costly maintenance.
Act 139 of the 1995 Legislature, however, is intended to address this issue. It establishes an irrigation water development special fund and allows the Department of Agriculture to use revenue bonds to finance the cost of construction, acquisition, or maintenance of water facilities. Backing the bonds would be user fees levied upon the beneficiaries of the facilities.
1. The October 18 start date suggests that for a period of three days, both DeRego and Wai Engineering were working on the ditch. No one seems to have noticed this discrepancy.
2. In a letter dated February 19, 1995, to Matsuo from the Hamakua-North Hilo Agricultural Cooperative, Shioji itemizes the various projects to be financed with Act 241 funds. Temporary ditch maintenance – that is, what had already been encumbered by the six-month contract with DeRego – came to $180,000, while estimated costs for a variety of other projects were placed at $560,000. “Total available for continued maintenance of Lower Hamakua Ditch,” Shioji concluded, amounted to $110,000.
— Patricia Tummons
Volume 6, Number 3 September 1995
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